Thursday, September 8, 2022
As widely expected, today the European Central Bank (ECB) raised its main refinancing rate by 75 basis points (0.75%) to 1.25% and signaled additional rate hikes in coming months may be warranted. Markets are currently pricing in an additional 75 basis point rate hike at its next meeting in October. Additionally, the ECB released its updated growth and inflation forecasts for the year. While inflation expectations were revised higher (to 8.1%), surprisingly, growth expectations were also revised higher (up to 3.1%). While the ECB thinks growth will slow next year (to 0.9%), it is not forecasting a recession in the Eurozone.
With today’s rate hike, the ECB joins more than 40 central banks, including the Federal Reserve, to raise rates by at least 75 basis points. Earlier this week, the Bank of Canada also raised its main lending rate by 75 basis points. Global central banks have been front-loading rate hikes to try to get out in front of stubbornly high consumer price increases in an effort to make sure inflation expectations remain well-anchored.
Unlike the U.S. where inflationary pressures have likely peaked, within the Euro-zone, inflationary pressures continue to move higher. As seen in the LPL Chart of the Day, euro-zone inflation hit 9.1% year-over-year in August while core inflation was higher by 4.3% over the past year. Inflationary pressures will likely worsen in the near term as the Nord Stream pipeline, an important pipeline for natural gas, remains closed for now.
“The ECB remains in a tricky situation in trying to tackle these elevated levels of consumer price increases,” noted LPL Financial Fixed Income Strategist Lawrence Gillum. “The last time the ECB embarked on rate hikes, it precipitated the 2011 euro debt crisis.” And while the ECB has additional tools at its disposal this time around, most notably its Transmission Protection Instrument, periphery Eurozone countries like Italy and Greece remain heavily indebted. In the press conference following the ECB meeting, President Christine Lagarde said more hikes are coming in future meetings. And while she was reluctant to provide a terminal rate, surprisingly she said the ECB would likely continue to raise rates over the next “two to five” meetings. Certainly, the risk is that the ECB overtightens and causes a similar debt crisis as seen over a decade ago.
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