ECB may take smaller step, but won’t signal end of journey

FRANKFURT ̵1; The European Central Bank is expected to take its foot off the rate-tightening pedal on Thursday by opting for a smaller rate hike of 0.25 per cent, while indicating that further rates are yet to come.

The ECB’s decision will follow on the heels of the US Fed, which is expected to hike by a modest 25 basis points later today, but with markets predicting Chair Jerome Powell would signal a possible pause in tightening thereafter.

Referring to the outcome of the central bank’s rate-setting meeting, Frank Dixmeier, fixed income chief investment officer at Allianz Global Investors, said: “We believe the ECB could hike rates by 25 basis points and intend to move forward.” may indicate.” “While the US Federal Reserve is almost at the end of its monetary policy tightening cycle, the European Central Bank is still far from a pivot.”

Thursday’s rate hike would be the seventh consecutive increase for the ECB, which has already raised the key deposit rate from -0.5 percent to 3.0 percent since last July, the most aggressive hiking cycle since the launch of the single currency.

This has added higher borrowing costs to the pain of rising prices for both households and consumers, but the ECB has stressed that tightening is needed to avoid an even more damaging price spiral.

policy hawks on the Governing Council, including Isabel Schnabel, has insisted that an increase of 0.50 percentage point remains on the table, depending on incoming data. But the tightening effect of previous rate hikes on funding conditions, exacerbated by recent bank collapses in the US and Switzerland, appears to be tipping the balance in favor of a more modest move.

Latest data from earlier this week Has shown Headline inflation rose from 6.9 percent in March to 7.0 percent in April after five months of decline. At the same time, however, core inflation – which filters out volatile components of food and energy prices and is seen as a better reflection of the underlying trend – edged lower for the first time in 10 months.

The ECB’s bank credit survey also showed that banks have become more cautious about lending since the euro sovereign debt crisis a decade ago, tightening their credit standards at the fastest pace, suggesting that the previous The rate hike is starting to feed into the real economy, slowing both the economy and price growth.

The bank credit survey and inflation data for April “add to our conviction that the ECB will reduce the pace of monetary policy tightening this week to a further 25 bp hike,” Klaus Wittesen, economist at Pantheon Macroeconomics, said in a note.

While Berenberg economist Holger Schmiding also bet on a 0.25 percentage point hike on Thursday, he sees a 30 percent chance that policy will follow through with a 0.5 percentage point increase, pointing to powerful arguments in favor of aggressive action: Current inflation is still three times the target, wage negotiations are under increasing pressure, and a brief banking tremor in Europe has largely subsided.

Whatever the size of Thursday’s rate hike, President Christine Lagarde called for an end to tightening, underscoring the ECB’s commitment to meeting its targets and stressing that future action will depend on incoming data. Indicating will leave no doubt. The market is currently betting on the deposit rate peaking at 3.75 per cent.