75 bps hike expected but TLTROs and QT on the table

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Christine Lagarde, president of the European Central Bank, is expected to announce another 75 basis point increase.

Bloomberg | Bloomberg | Getty Images

While the European Central Bank is expected to announce another rate hike on Thursday, market players seem more focused on two other policy tools as the region heads into recession.

The central bank is considering raising inflation to record highs, but an economy slowing, and many economists predict a recession before the end of the year. If the ECB takes a very aggressive stance in raising interest rates to counter inflation, it risks putting the economy in further trouble.

In this context, it is widely seen that the ECB will raise interest rates by 75 basis points later this week. This would be the second consecutive jumbo increase and the third increase this year.

“The ECB is likely to raise its three key rates by 75 basis points and suggests that it will go further at its next policy meetings without providing clear guidance on the size and number of steps to take,” said Holger Schmieding, chief economist at Berenberg. , said in a note Tuesday.

Given the inflationary pressures – September inflation came in at 10% – analysts expect an increase of at least 50 basis points in December. The bank’s principal interest rate is currently 0.75%.

“There appears to be a growing consensus to bring the deposit rate to 2% by the end of the year, implying a 50 basis point increase in December, with a reassessment of the economic and inflation outlook in early 2023,” said Frederik Ducrozet. chief of macroeconomic research at Pictet Wealth Management, said in a note Friday.

Two big questions

Tariffs aside, there are two questions in the minds of market players that need to be answered: when will the ECB start deleveraging its balance sheet, in a process known as quantitative tightening, and what will happen to it in the near future? credit conditions for banks. After the euro crisis of 2011 and the outbreak of Covid-19 in 2020, the ECB has implemented quantitative easing for years, buying assets such as government bonds to simulate demand.

“When it comes to QT, boring is beautiful,” Ducrozet said, adding that he expects the process to begin in Q2 2023. QT is expected to be “predictable, gradual and passive, starting with the end of reinvestments under the Asset Purchase Program (APP), but not actively selling bonds anytime soon,” he said.

Camille De Courcel, head of European interest rate strategy at BNP Paribas, said in a note Monday that the central bank may wait until its December meeting to provide details on QT, but it will likely begin reducing its balance sheet by around EUR 28 billion. on average per month as it happens.

But perhaps the biggest uncertainty at this stage is whether credit conditions for European banks will change.

“We think Thursday [the ECB] will reveal a decision on the TLTRO, either the fee or the cost. We think that the new measure will only come into effect in December,” said De Courcel.

The longer-term targeted refinancing operations, or TLTROs, are a tool that offers European banks attractive lending conditions, hopefully giving these institutions more incentives to lend to the real economy.

Because the ECB has raised rates faster than the central bank initially expected, European lenders are taking advantage of the attractive lending rates through TLTROs and are also making more money from the higher interest rates.

“Optics are bad against the backdrop of a historic shock to household income, and political pressures cannot be ignored,” Ducrozet said.

The euros traded slightly higher against the US dollar on Wednesday at $0.997. The weakness of the single currency is a concern for the central bank, although it repeatedly states that it does not pursue the exchange rate.

The Valley Voice
The Valley Voicehttp://thevalleyvoice.org
Christopher Brito is a social media producer and trending writer for The Valley Voice, with a focus on sports and stories related to race and culture.

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