A 50bp Rate Hike Next Week In Eurozone Looks Like A Done Deal

Thursday's European Central Bank interest-rate decision and U.S. inflation data on Tuesday will be the main focus next week.

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Interest rates

The ECB, Fed, Bank of England (BoE) and other central banks have aggressively raised interest rates in an attempt to bring inflation back to the 2% target. The UK and US raised their benchmark interest rates from near zero a year ago to 4% and 4.5% respectively, while the corresponding ECB rate is up to 2.5%

Interest rate expectations in the Eurozone and the US have been rising recently, putting these two developments in the spotlight.

The ECB is widely expected to raise interest rates by 50 basis points, taking the deposit rate to 3.00%.

Inflation still too high

The world's major economies have been battling rapid inflation for almost two years. After many years of very slow price growth, in 2022 annual inflation in many economies reached double-digit values. This was due to supply chain disruptions in response to COVID-19 and the war in Ukraine, which has pushed up energy and food prices.

In the euro zone core inflation increased from 5.3% in January to 5.6% in February.

In addition to the main factors influencing inflation, other equally important reasons can be indicated. The reason why core inflation remains elevated may be the fact that unemployment is so low . For example, in the service sector in the Eurozone, we see wages rising as companies compete to pay for workers. Another factor was companies raising prices faster than usual to maintain their profit margins.

As most consumers already know all too well, increased inflation lowers the standard of living. This means people can buy fewer items for the same amount of money, making weekly shopping more and more stressful.

As signaled by Powell (the head of the Fed) and Lagarde (ECB), the latest inflation data indicate the need for further aggressive interest rate increases.

Now 50bp and May too?

March's move was well signaled by the central bank, focusing on any signals as to how far and how quickly interest rates will rise in the future, in particular whether the ECB will go ahead with another 50 basis point hike in May.

Some analysts raised their ECB interest rate forecasts due to recent strong inflation data, which pushed eurozone bond yields higher.

Comments from ECB President Christine Lagarde at the press conference following Thursday's decision will be crucial for the eurozone, especially after ECB policymaker Robert Holzmann called for three more moves of 50bps after this month's meeting.

Expect the worst?

While there have been some positive developments in confidence metrics since the start of the year, the hard data is still far from rosy. Interestingly, two downward revisions of German GDP data and one downward revision of Irish GDP data brought the Eurozone economy to the brink of recession in Q4 2022 and another stagnation in Q1 cannot yet be ruled out.

The ECB's own consumer expectations survey this week showed a further decline in consumer inflation expectations. At the same time, however, core inflation continued to rise and so far there are no signs of a peak. Industry selling price expectations have dropped significantly but remain close to all-time highs for services.

Source: investing.com