75 bps hike expected but TLTROs and QT on the table

Christine Lagarde, president of the European Central Bank, expects to announce another 75 basis points.

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Although it is expected that the European Central Bank will announce another rate increase on Thursday, market traders are focusing more on two other policy tools as the region approaches the recession.

The central bank is considering inflation to remain at a high level but the economy is slowing, and many economists are predicting a recession before the end of the year. If the ECB takes a more aggressive position in increasing rates to fight inflation, there is a risk that it suggests the economy into another crisis.

In this scenario, the ECB is seen raising rates by 75 basis points later this week. This will be the second jumbo trip in a row and the third increase this year.

“The ECB will raise its three policy rates by 75 basis points and suggest that it will continue in the next few policy meetings without giving clear guidance on the size and number of measures to be taken. – coming,” Holger Schmieding, chief economist at Berenberg. , said in a note Tuesday.

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Given the price pressure – the rate of inflation in September came in at 10% – analysts expect at least another 50 basis points in December. The bank rate is currently at 0.75%.

“The growing agreement seems to support the availability of deposits at 2% by the end of the year, showing a 50 point drop in December, and reassessing the economic outlook and growth at the beginning of 2023,” Frederik Ducrozet. head of macroeconomic research at Pictet Wealth Management, said in a note Friday.

Two big questions

Currency aside, there are two questions on the minds of market players: When will the ECB begin to loosen its balance sheet, in a process known as quantitative tightening, and what will happen to the lending conditions for banks in the future? near. The ECB has carried out several years of quantitative easing, where it buys assets such as government bonds to stimulate demand, following the euro crisis of 2011 and the outbreak of Covid-19 in 2020.

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“When it comes to QT, it’s pretty boring,” Ducrozet said, adding that he expects the process to start in the second quarter of 2023. QT expects “to predictable, slow, passive, beginning with the end of reinvestments below. Asset Purchase Program (APP) but not selling bonds anytime soon, “he said.

Camille De Courcel, head of European rate strategy at BNP Paribas, said in a note on Monday that the central bank may wait until the December meeting to give details on QT but that it will start reducing its balance sheet by about 28 billion euros and . average monthly when it happens.

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Perhaps the biggest uncertainty at this stage is whether lending conditions will change for European banks.

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“We are waiting for Thursday [the ECB] will reveal the decision on the TLTRO, or its reward, or its cost. We think that the new system will only start in December,” said De Courcel.

The targeted long-term refinancing operation, or TLTRO, is a tool that gives European banks attractive lending conditions – hoping to give these companies another incentive to lend to real estate.

Because the ECB is expanding faster than the central bank had previously expected, European lenders are benefiting from attractive lending rates through the TLTRO and also earning money from interest rates. high child.

“Optics are bad against the background of historical abuse of family income, and political pressure cannot be ignored,” Ducrozet said.

No euros sold slightly higher than the US dollar on Wednesday at $0.997. The weakness of the common currency has been a concern for the central bank although it has repeatedly said that it does not monitor the exchange rate.

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