Will The European Central Bank’s (ECB) Interest Rate Decision Meet Market Expectations?

In the current situation, the ECB turns a blind eye to the risk of recession, but is very determined to bring down inflation and inflation expectations. To that end, it is hard to imagine how the ECB could not raise rates again.

The economic outlook

The economic situation is not looking very good in Europe and the euro area. Recent data showed a worsening picture of the situation. Many experts believe that the region may face a serious recession in the near future. Also the attempts by the ECB to raise the euro exchange rate through further tightening should continue to be ineffective in the near future.

The economy is expected to stagnate in the first quarter of 2023. Very high energy prices reduce the purchasing power of the population's income. Moreover, Russia's unjustified aggression against Ukraine continues to undermine the confidence of entrepreneurs and consumers.

The steady rise in prices in Europe is making households and businesses prepare for even greater pressure in the coming months.

Previous date

Economic difficulties have arisen since the start of the covid-19 pandemic. The persistent threats caused by the pandemic continue to pose a threat to the smooth transmission of monetary policy. Nevertheless, the European Central Bank did not manage to raise interest rates at that time and for a long time the rate was at 0.0%.

The situation regarding interest rates changed after the second quarter of 2022. Inflation rose sharply, and other macroeconomic data were also not optimistic. For this reason, the ECB decided to raise rates by 50 bp. The first rate hike was expected to be milder, the forecast was at 0.25%. Another hike was also hawkish. And now the rate is 1.25%.

It’s true that the ECB has consistently surprised on the hawkish side in the past few meetings, but the positive impact on the euro have been null.

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Source: investing.com

What to expect?

The economic background has hardly changed since September. Confidence indicators continue to decline, while data for the third quarter point to a very mild contraction in the eurozone economy. Needless to say, the outlook for the euro area economy is surrounded by an extremely high degree of uncertainty.

Price pressures across the economy continued to strengthen and widen, and inflation may increase further in the near term. It is believed that the peak of inflation is close, but the economic situation will depend on the situation related to Russia's invasion of Ukraine.

The Governing Council stands ready to adjust all instruments to ensure that inflation stabilizes at the 2% target. Finally, the ECB managed to lead the market expectations and next week's meeting may be the first without such a surprise.

According to the minutes from the previous meeting, policy makers at the European Central Bank (ECB) were concerned that inflation might be stuck at a high level, so aggressive tightening was necessary. We can expect that this mood will also replicate at the next week's meeting.

The September hike of the ECB by 75bp was expected by the markets, and now it expects that its next move in politics, planned for October 27, will be similar. Contrary to the preparations for the July and September meetings, there was no public controversy about the size of the rate hike.

Source: investing.com, ecb.europa.eu