ECB raises rates again by 0.75%. Another 0.50% expected in December
ECB keeps up the pace with another 0.75% rate hike
The ECB held its regular monetary policy meeting today and decided to raise official interest rates by another 0.75%, taking cumulative rate hikes since July to 2.0%. In previous cycles, it took 18 months to tighten policy by this magnitude, making this by some margin the central bank’s most aggressive rate hiking cycle to date.
Future rate hikes to be more measured
The sense though following today’s policy meeting is that future changes to policy will be more measured. Although she did say that the risks to inflation are still very much to the upside and that further rate increases would still be necessary, President Lagarde did also speak of both the downside risks to growth and the transmission lag until the impact of the 2.0% increase in official rates since July will be reflected in lower demand and inflation in the Eurozone.
Term rates and euro both lower today but markets to remain volatile
Markets have taken this mention of recession to mean a dovish pivot from Lagarde and as a result, 3-year fixed rates have fallen by more than 0.20% since the policy meeting this afternoon. The lower outlook for rates has also affected the euro which closed lower, down over 0.5c against the pound and 1c against the dollar.
As of this evening, the forward curve for rates is now pricing in a smaller 0.50% increase in official rates at the December meeting and a 0.25% increase at the next meeting in February with a final 0.25% rate hike to arrive by the summer. However, given that headline inflation is at 9.9% and core inflation (excluding volatile food and energy) is at 4.8%, the ECB still has some wood to chop before it can achieve its primary mandate of maintaining inflation at 2%. The fall in gas prices in recent weeks is helpful but much uncertainty remains, both politically and economically. As a result, we can expect to see this uncertainty manifest itself as continued volatility in financial markets and large swings in prices for both term interest rates and the euro going into the December meeting and year end.
Martin Mulligan
Martin Mulligan is the founder of Vuca Treasury. Since 1994, Martin has structured and sold foreign currency, interest rate and commodity hedges for corporate and financial institutional clients at a number of major banks in Ireland, Australia and the UK.
This blog has been prepared by Vuca Treasury Ltd and is for information
purposes only and does not constitute investment advice. The information contained
herein is based on materials and sources that we believe to be reliable.
However, Vuca Treasury makes no representation or warranty, either express or
implied, in relation to the accuracy, completeness or reliability of the
information contained herein. Except in the case of fraudulent
misrepresentation, no liability is accepted whatsoever for any direct, indirect
or consequential loss arising from the use of this document. No
client-advisor relationship shall be created as a result of this presentation
and/ or your use of the information contained in it. A client relationship
shall only arise where you become a client of Vuca Treasury by way of our
formal engagement agreement.