On Thursday, the European Central Bank is expected to raise interest rates for the first time since 2011. Differences between countries in the eurozone make the situation complicated.
At its June interest rate meeting, the European Central Bank (ECB) kept the interest rate unchanged at 0.5 percent, but then announced that it would raise the rate by a quarter of a percentage point in July. They also announced that there will be more rate hikes in September.
On Thursday, the interest rate meeting will take place and the interest rate announcement will arrive at 14.15 Norwegian time.
Although the central bank has announced a 0.25 percent rate hike, some have begun to speculate whether the rate hike will be even higher. The Fed announced a “three rate hike” in June, at 0.75 percentage points.
According to Reuters, the European Central Bank estimates an increase of 0.25 or 0.50 percentage points. But Nordea Markets sticks to the previous signals:
The media recently indicated that the ECB will also discuss a major adjustment this week, but we believe the ECB will continue to follow its previous guidance and raise interest rates by 25 basis points, the broker wrote in a report.
– After all, the European Central Bank has focused too much on its previous directives. Several central bank members emphasized that from a financing perspective, a 25 or 50 basis point increase does not make much difference. But a 50 basis point increase this week could have a bigger impact on the ECB’s credibility, it was reported.
Strong inflation growth
One of the reasons for the expected rise in interest rates is the high growth of inflation, which is constantly setting new records.
Official figures came on Tuesday, which showed that inflation in countries that use the euro (the eurozone) rose to 8.6 percent in June. In comparison, the central bank’s goal is 2 percent inflation over time. A number of countries in the eurozone reached double-digit inflation and Estonia was highest at 22 percent.
At the previous monetary policy meeting, the European Central Bank acknowledged that inflation is a major challenge in the Eurozone.
High inflation is a big challenge for all of us. The Executive Board will ensure that inflation returns to the 2 percent target in the medium term, the European Central Bank said at the time.
And the central bank will likely continue to stress that it is fighting inflation, Nordea believes:
With soaring inflation and mounting pressure on prices, the European Central Bank has no room to hold back its rhetoric at Thursday’s meeting, the brokerage wrote.
After the last interest rate meeting of the European Central Bank, the drama erupted when the central bank held an urgent meeting.
After the emergency meeting, the central bank wrote that it would use a new tool to prevent turmoil in the fixed income market, with Italy in particular having seen a sharp rise in government interest rates.
However, Nordea writes in its report that it is unlikely that more details about the tool will likely not convince the market:
— and even if it does, ESB is unlikely to be willing to use the full power of the tool, unless absolutely necessary, the brokerage writes.
The economic situation is different in different countries in the Eurozone. This makes it difficult to set a “one size fits all” interest rate and the ECB has to make concessions with some countries.
Germany is one of the most important countries in the Eurozone and has good economic development. The German ten-year interest rate is central to the European Union and was around 1.25 percent on Tuesday.
On the other hand, countries like Italy and Greece have very high government debt. Therefore it is highly exposed to the expected rise in interest rates at the European Central Bank. According to a publication from Eurostat, total debt in EU member states made up 93 percent of the country’s GDP in 2021.
double the euro
The European Central Bank has a lot to contend with, and the euro’s weakness as a currency is one concern. Last week, the euro and the dollar were equal to the same amount, and that hasn’t happened in 20 years.
Usually, the euro is higher than the dollar, but it has been notably weak lately against many currencies.
– A weaker euro may cause some central bank members to worry, but the European Central Bank may believe optimistic comments about key interest rates are the best response to the currency outlook at this time, Nordea Markets writes in its report.
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