“We expect rates to rise by 75 basis points,” says Franck Dixmier, director of bond management at Allianz Global Investors, illustrating the shift in the consensus of observers who initially expected a 50 basis point increase in key rates.
Such an increase would be a first for the monetary institute, in two decades of existence.
“Given the level of inflation and the uncertainty as to the future evolution of prices, there is less risk for the ECB to do more than to do less”, justifies Mr. Dixmier.
In July, it had a firm hand by announcing a surprise increase of 50 basis points, when 25 points were expected.
This first rise in more than a decade came after a long period of cheap money helping to stimulate the economy.
The guardians of the euro thus put an end to eight years of negative rates in one fell swoop by reducing the rate on banks’ deposits with the ECB from -0.5% to 0%.
Preserve purchasing power
The promise was then to do the same in September unless inflationary pressures ebb.
However, the opposite happened. Prices rose in August by 9.1% over one year in the euro zone, unheard of since the creation of the common currency. Inflation is thus well above the rate of 2% targeted by the ECB.
The new tensions in energy prices since the complete halt in the supply of Russian gas to Europe even presage double-digit inflation in the fall.
In this turbulent context, there remains within the ECB a fraction of decision-makers who still defend “gradualism” in terms of rate hikes, led by chief economist Philip Lane.
But this clan “is in the minority”, remarks Bruno Cavalier, economist at Oddo.
The weakness of the euro, which sank below the $0.99 threshold on Monday, is another argument for a monetary blow.
A weak euro increases the cost of imported products, which fuels inflation.
Also, the only possible way is that of “determination” in the face of unbridled prices and this “even at the risk of weaker growth and higher unemployment”, hammered at the end of August Isabel Schnabel, influential member of the executive board. of the ECB.
The dilemma between rising prices and fears of recession has slowed the action of the ECB for the past year, while other major central banks have launched a cycle of rate hikes.
But if a central bank is slow to adapt its policy, “the costs can be considerable”, admitted Ms Schnabel, acknowledging that the ECB had believed for too long that the inflationary shock would be temporary.
However, the public must maintain “confidence in our ability to preserve purchasing power”, insisted Ms. Schnabel.
US Federal Reserve rates are between 2.25 and 2.50% and a 75 basis point hike is looming on September 21st.
For the ECB, whose rates range between 0% and 0.75%, the turn of the screw should continue “until the key rates reach a more + neutral + level, between 1% and 2%”, according to Frederik Ducrozet, Chief Economist at Pictet Wealth Management.
A rate is said to be neutral when it neither stimulates nor slows down the economy.
The ECB will base itself on Thursday on new economic forecasts at a time when most institutes see the euro zone entering recession this winter.
“We could well be heading towards one of the most difficult winters in generations,” warned the European Commissioner for the Economy, Paolo Gentiloni, on Wednesday.
The problem is that an aggressive sequence of the ECB on its rates will increase the borrowing conditions of the countries of the euro zone considered vulnerable, such as Italy.
The institute may have to draw sooner or later its new tool, presented this summer, intended to nip speculative attacks on debt in the bud, according to Holger Schmieding, economist at Berenberg.