The European Central Bank will hold a monetary policy meeting on May 4. The analysis pointed out that the current inflation level in the euro zone is still much higher than the target set by the European Central Bank. Although there are still differences within the European Central Bank on whether to continue to raise interest rates, it is expected that the monetary policy meeting will continue to raise interest rates.
Several officials hinted at continuing to raise interest rates
According to foreign media reports, the recent statements of a number of ECB officials show that the ECB is likely to continue raising interest rates at its monetary policy meeting on May 4.
According to a Reuters report on the 24th, European Central Bank official Isabel Schnabel said that raising interest rates by 50 basis points is not out of consideration, which will depend on economic data, especially inflation data released a few days before the meeting on the 4th.
Philip Lane, chief economist of the European Central Bank, said on the 19th that if the situation is still in line with expectations, it will be appropriate for the European Central Bank to continue raising interest rates to curb inflation.
At the March monetary policy meeting, the European Central Bank decided to raise interest rates by 50 basis points. The minutes of the meeting released on the 20th showed that despite risks to financial stability, most ECB officials still agreed to continue raising interest rates by 50 basis points in March. Officials believe that it is very important to stick to the original plan, which will help build market confidence and prevent the market from facing further uncertainty. The minutes highlighted that inflation remained well above the central bank’s 2 percent target.
However, there are also some different voices within the ECB.
ECB official François Villeroy de Galhout called for limiting the number and size of further rate hikes in an interview with Le Figaro.
The latest meeting minutes show that at the March meeting, some ECB officials believed that considering the recent turmoil in the financial market, the pace of raising interest rates should be suspended until the financial market risks eased before raising interest rates.
In March, several regional banks in the United States collapsed, followed by a crisis in Credit Suisse, which was acquired by rival UBS at a low price. This caused investors to worry about the stability of financial markets, and the central bank is expected to slow down the pace of interest rate hikes.
According to the analysis, although the European Central Bank is expected to continue to raise interest rates, it is still difficult to determine the extent of interest rate hikes.
ING economist Carsten Brzeski said the minutes showed a growing debate about the impact of monetary policy, suggesting officials were divided on the extent of future rate hikes. At the meeting on May 4, both 25 basis points and 50 basis points of interest rate hikes are possible.
Rate hike expectations push euro higher
As investors expect that the European Central Bank is likely to continue to raise interest rates, while the Federal Reserve may begin to cut interest rates in the near future, the exchange rate of the euro against the US dollar rose significantly on the 24th.
The U.S. dollar index, which measures the U.S. dollar against six major currencies, fell 0.46% on the 24th to close at 101.3522 in late trading. As of late New York trading, the euro was trading at $1.1045, up from $1.0976 in the previous session.
According to foreign media reports, the First Republic Bank of the United States said on the 24th that its deposits in the first quarter plummeted by more than 40% from the previous quarter. Turn to rate cuts.
According to futures market data, investors currently expect an 88% probability that the Federal Reserve will raise interest rates at its monetary policy meeting next week, but may cut interest rates by 50 basis points before the end of the year; the European Central Bank may raise interest rates by 25 basis points at its meeting next week About 2/3, and the probability of raising interest rates by 50 basis points is about 1/3.
Analysts at the Bank of Singapore said that if the European Central Bank does raise interest rates by 50 basis points at its May meeting, it will provide further support for the euro.
The exchange rate of the euro against the yen hit an eight-year high of 148.47 yen to the euro on the 24th. New Bank of Japan Governor Kazuo Ueda, who will hold his first monetary policy meeting this week after taking office, has been signaling that he is in no rush to change the current ultra-loose monetary policy.
The yen was also at its weakest against the Swiss franc in 20 years at 151.33 yen per Swiss franc, according to data from Electronic Brokerage Services going back to the early 2000s. The yen was steady against the dollar at 134.28 yen per dollar.
Core inflation remains high
Affected by factors such as the decline in energy prices, the inflation rate in the euro zone fell in March to an annual rate of 6.9%, down from 8.5% in February.
European Central Bank President Christine Lagarde said this month that high inflation in the euro zone should decline in the coming months, but warned that there was still “considerable uncertainty” in the forecast, with both upside risks and risks. Downside risk.
Lagarde said higher-than-expected wage growth could keep inflation high, while “financial market tensions” or rapidly falling energy prices could slow it further.
According to the latest European Central Bank forecast, the average inflation rate in 2023 will be 5.3%, which will still be far above the inflation target; it is expected to decline to 2.9% in 2024; and it will further drop to 2.1% in 2025.
In order to curb the persistently high inflation, the European Central Bank has raised interest rates several times, and has raised interest rates six times since July last year, with a total of 350 basis points. Analysts pointed out that the recent turmoil in the banking industry in the US and Europe shows that aggressive interest rate hikes are not without cost.
European Central Bank official Robert Herzmann said he suggested two months ago that the ECB would raise interest rates four more times starting in May, but it now appears that the current situation needs to be assessed more carefully before the May meeting. The turmoil in the banking sector weighed on the economic outlook.
In March, the core inflation rate in the euro area continued to rise. In the month, the core inflation rate, which excludes energy, food, tobacco and alcohol prices, was 5.7%.
Gediminas Simkus, an official of the European Central Bank, said that the continued high core inflation rate in the euro zone is worrying, and the core inflation rate may not have reached its peak. However, it should also take into account the lag in the effect of tightening monetary policy on the economy.
Persistently high core inflation needs to be considered, but it is not the only factor that matters, Herzman said, especially as financial conditions have tightened significantly, with less credit available to households and businesses.
European Central Bank official Iniazio Visco said that assessing the ECB’s rate hike process should be patient, especially given that credit conditions have tightened significantly. Visco said the data showed that credit growth had fallen from over 10% last summer to zero or actually negative. Visco said ECB policymakers will be watching economic data closely to confirm that core inflation has fallen and that the central bank’s inflation target is being met.