At the ECB’s Governing Council meeting on Thursday, the Council is expected to have an honest and open discussion about how large to increase rates for the first time in 11 years, despite stubbornly high living costs.
Reuters reported that the ECB would consider whether to opt for a 50 basis point hike instead of the 25 basis points already planned on Tuesday morning, which sent the euro to a two-week high.
“It is possible that the ECB wants the option of a 50bp hike because of something its has seen in the unpublished inflation expectations data,” wrote Mark Wall and his colleagues at Deutsche Bank Research.
“It is possible also that the option of a 50bp hike helps in negotiating the details of a strong anti-fragmentation tool,” he said, referring to the new stimulus package due to be announced Thursday, which will target surging debt yields in peripheral nations such as Italy.
As Italy faces yet another severe political crisis, the details of this new antifragmentation tool will be closely watched.
“While ECB President Lagarde is likely to stress the temporary nature of the instrument, owing to the exceptional circumstances the euro area finds itself in, she will also underline the ECB’s determination to secure the integrity of the monetary union, thereby trying to evoke a ‘whatever it takes’ spirit,” Dirk Schumacher, an analyst from Natixis said.
“The fine line President Lagarde will have to walk here — also in light of the political situation in Italy — increases the risk of a ‘misunderstanding’ and erratic market moves,” Schumacher added.
Both the new tool and a large rate hike would come as the ECB focuses on its primary mandate: price stability. In June, euro zone inflation rose to 8.6% from 8.1% in May, and German producer prices were 32.7% higher than a year earlier. In spite of this, signs of improvement are evident.
“Prices of intermediate goods (excluding energy) did not rise as strongly as before. Here, the year-on-year comparison fell for the second month in a row, due among other things to somewhat lower prices of metals,” according to Commerzbank analysts.
“As intermediate goods are ahead of consumer goods prices in this cycle, this gives rise to hopes that the latter will also peak in the coming months.”
An increasing risk of a gas disruption during the next weeks makes the economic outlook quite uncertain at this point. Gas supplies from Russia are expected to be cut off for some time as maintenance continues on the Nord Stream 1 pipeline that carries gas from Russia to Germany via the Baltic Sea.
Some worry that the delivery suspension could last longer than 10 days, resulting in the region’s winter supply preparations being compromised.
Look what Anatoli Annenkov has to say, “Importantly, the ECB may have to keep tightening policy, even through a light recession, if wage acceleration and continued high energy prices result in rising inflation expectations.”
“We believe raising the policy rate at least to the bottom of the range of estimates of the natural rate (1-2%) thus makes sense in order to be in a better position next year to address the inflation outlook,” he added.