The European Central Bank (ECB) is expected to continue raising interest rates at its meeting on Thursday and economists expect a further 75 basis point hike despite the risk of a recession.
The institution wants to continue to tighten credit access conditions to “stop demand,” ECB president Christine Lagarde said at the end of September.
The priority is not to let inflation “take root,” Lagarde said, after the latest data points to an annual inflation rate of 9.9% in September in the eurozone, far from the 2% the ECB has set as a target..
The ECB has already decided on two rate hikes since the beginning of the summer, ending a decade of expansionary monetary policy. In July it started up 50 basis points and in September it accelerated to a rise of 75 basis points, just as expected.
“We expect a 75 basis point increase at the next European Central Bank meeting on October 27,” Franck Dixmier of Allianz Global Investors said in a note sent to Lusa, adding that “since the last ECB meeting in September , little changed in the context of inflation”.
Dixmier believes that “growth is weakening week by week, pointing to an impending recession, although at this stage it is difficult to estimate the extent of the slowdown”.
The interest rate applied to bank deposits, one of the three key ECB interest rates, which has been negative for several years, is currently at 0.75% and will be closer to 2%, which is the level considered neutral for the activity.
The ECB remains “very determined” on inflation and “closes its eyes to the risk of a recession”, which it sees as inevitable in 2023said Carsten Brzeski, economist at ING, quoted by AFP.
Inflation tends to be rife, “awakening” after a decade of lethargy, German central bank leader Joachim Nagel summed up in a speech to Harvard students.
Nagel, a figure associated with the “hawks”, supporters of a restrictive monetary policy, defended the need to react quickly to interest rates in order to “tame” inflation.
While Lagarde stated in September that the most appropriate tool to curb inflation is interest rates, the ECB should also start discussing a new phase, that of deleveraging its balance sheet, which has increased significantly after years of anti-crisis policies. asset purchase programs to keep interest rates low and support the economy.
For Dixmier “it will be interesting to hear from ECB President Christine Lagarde about the deleveraging of the central bank’s balance sheet. In fact, the meeting of governors should give them a chance to talk about Quantitative Tightening (QT)) Christine Lagarde is expected to reaffirm that QT will not begin until after the end of the rate hike cycle without giving details on ‘timing'”.
This policy of “quantitative tightening” should only happen in the first few months of 2023, taking other analysts into account, bearing in mind the risks of financial market shaking in an already highly volatile context.
The ECB can also indicate what it intends to do with regard to loans granted in recent years to banks with long and very low interest rates, sometimes even negative, to encourage them to lend.
With interest rates rising and the deposit rate no longer negative, the interest paid by banks is lower than the interest they receive for depositing excess reserves with the ECB, prompting the institution to study changes in the terms of these operations. .
Source: DN
