European Central Bank President Christine Lagarde said last week the eurozone economy would do “much better” than previously feared
DanielRoland
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The European Central Bank is expected to continue its inflation war with another rate hike on Thursday, albeit with growing signs that the euro zone may have weathered the worst of the economic shock.
After the Russian invasion of Ukraine pushed up energy and food costs across the single currency area, the ECB embarked on the most aggressive monetary tightening cycle in its history.
Since July, it has hiked interest rates by 2.5 percentage points to dampen consumer price growth – which peaked in October at 10.6 percent, more than five times the bank’s target.
Although inflation is still high, it has started to slow, raising hopes that the Frankfurt-based institution’s efforts are bearing fruit.
A spate of new data, including a key survey showing that Europe’s economy has started to grow again, has even raised hopes that the euro zone will avoid a sharp downturn.
However, ECB President Christine Lagarde has repeatedly stressed that rates will continue to rise at a steady pace and the bank is expected to agree to a 50 basis point hike on Thursday.
That would be the same increase as the Governing Council’s last meeting in December, but less than two massive 75 basis point hikes at its previous two meetings.
“The reason for a rate hike of 50 (basis points) is clear: the ECB’s work is far from done,” said ING economist Carsten Brzeski.
Still, recent, less somber data is raising hopes that Russia’s efforts to choke off key gas supplies to Europe will not trigger the economic shock once feared.
When Moscow cut supplies after invading Ukraine, European governments introduced bailout measures to protect consumers and businesses from soaring prices and rushed to restock.
Wholesale gas prices have fallen, while relatively mild winter weather has meant stocks have not been depleted as quickly as expected.
The closely watched S&P Global Flash Eurozone Purchasing Managers’ Index (PMI) surged above 50 in January.
That read points to growth and fueled optimism that a slowdown in inflation and supply chain issues, as well as a reopening of the Chinese economy, could offset the impact of Ukraine.
And in its most recent forecast last week, the German government projected that Europe’s biggest economy would narrowly avoid a recession in 2023, revising a previous October estimate that a slight contraction would occur.
After months of decline and gloom, officials suggest a more positive note on the prospects for the 20-nation club.
Speaking at the World Economic Forum in Davos earlier this month, Lagarde said the eurozone economy would do “much better” than initially feared, with the news being “much more positive in recent weeks”.
In the United States, too, the Federal Reserve is likely to raise interest rates again at the end of its meeting this week.
Like the ECB, it has slowed rate hikes as the outlook brightens and there are expectations that it could pull back to 25 basis points from a 50 basis point hike.
While the ECB has stressed that it will “stay the course” to bring inflation back on target, policymakers are walking a fine line – trying to tighten monetary policy as much, but not as much, that this is dramatically increasing the economic pain across Europe.
Most analysts are also expecting a 50 basis point hike in March, but as inflation begins to ease, there are already signs of debate among policymakers over when to slow the pace.
ECB board member Fabio Panetta, known for his dovish stance, said the bank should not commit to any specific rate hike beyond the forthcoming meeting.
Others, like Joachim Nagel, the head of Germany’s Bundesbank, have supported further increases in the future, Der Spiegel magazine reported.
All eyes will be on Lagarde’s comments after the rate decision is announced for clues on future direction.
“The focus of the meeting will likely be the rate forecast beyond February – will ‘steady pace’ and ‘significant’ rate hikes persist?” HSBC said in a note.
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