ECB: Record rate hike?

In a sense, the European Central Bank is the main topic of this week as it plans to accelerate rate hikes. The market sees about 70% probability of a 75 basis point increase. This will likely be the most likely outcome. A move as expected would be the largest rate hike since the inception of the ECB.

The tone of the debate surrounding the European Central Bank's interest rate decision seems to have changed. We observed that many prominent members of the Governing Council were pushing for a large interest rate at the stage where the ECB expected to raise all three main policy rates by 75 basis points in September. As the rational basis for this, inflation is again exceeding the estimates and the global monetary policy ground has become more hawkish. Therefore, despite the increasing threats of recession and the factors that mature it, especially the energy supply crisis, a front-loaded increase of 75 basis points seems to be the most likely outcome. Six members of the Board of Directors seem to support a 75 basis point increase, and more may have been convinced by expectations that exceed inflation in August.

Growth prospects in Europe and China have been looking bleak lately; This is something that could also lower commodity prices and strengthen the dollar, helping to speed up the Fed's disinflation process. But the global shock is also partly from supply-due to renewed quarantines in Europe due to rising natural gas prices from Russia and China due to the Covid-zero policy. On the other hand, higher inflation in Europe could cause the ECB to raise rates more aggressively, which could eventually weaken the dollar. However, we do not expect this to be permanent. The problem in the Euro is not due to the interest rate differences with the Fed, but to the European economy's entry into a new period. Therefore, even if the ECB raises interest rates by 75 basis points, a permanent recovery in the Euro may not come. Selling on the bond side, including German bonds, is very likely to continue. Because it will no longer be seen as a safe enough haven. A second point is the Italian-German spread. The ECB's interest rate hikes will cause interest rates to rise more sharply in Italy, as it is a much more indebted and troubled economy.

The ECB is likely to raise its short-term inflation forecasts above 9%, while long-term forecasts may remain just above 2%. The debate surrounding the ECB's next interest rate decision on September 8 will certainly depend on the views on this growth-inflation balance. Concerns about financial stability will leave some policy makers hesitant. To mitigate some of this risk, a large increase could possibly be combined with an emphasis on front-loading – after all, higher rates no longer mean higher rates in the medium term.

Kaynak:Tera Yatırım-Enver Erkan
Hibya Haber Ajansı