The European Central Bank has just announced another historic increase in interest rates by 75 basis points, thus doubling the level at which rates were before the announcement. With this increase, the deposit rate is currently at 1,5%, with highs similar to those of 2009, the financing rate at 2% (its highest value since January 2009) and the marginal lending rate at 2,25%. This increase is added to the increases of 0,5 points in July and 0,75 points in September.
This new increase was announced this Thursday by the ECB Governing Council, who, despite the risk of economic recession, are proposing the implementation of this strategy to "contain inflation that remains extremely high" and which, according to Eurostat data, reached 9,9% in the euro zone in September.
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For the European Central Bank, this 75 basis point increase was an obligation given the general increase in inflation in the Eurozone economy and further increases are not ruled out at the meetings to be held between now and the end of the year.
Over the past week, expectations regarding central bank rate hikes have been moderated. Until recently, the ECB's deposit rate was set at 3% for next year, but is now forecast to be around 2,8% by mid-2023.
However, experts point to the possibility that inflation may begin to lose momentum progressively while interest rates are already very close to or even exceed the neutral level in some cases, which could mean a paradigm shift for monetary policy. Similarly, the slowdown that the Eurozone is experiencing could also be key to reducing the pace of rate increases and could also lower expectations about the terminal rate, the peak of interest rates.
We are in a volatile macroeconomic context and from this point the ECB has pointed out that with this increase "considerable progress has been made in the shift towards an accommodative stance in monetary policy." They have also justified their decision to raise rates "meeting by meeting" and explained that it is possible that rates will continue to rise until inflation returns to the two percent target.
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The next meeting of this body will take place on December 15, 2022, and as some experts, such as Carmignac investment committee member Kevin Thozet, point out: “it is very likely that this will be followed by a new increase of 75 basis points.” This expert has previously clarified that this is expected, taking into account the objective of “setting rates at the neutral rate of 2% as soon as possible, bringing monetary policy into restrictive territory in order to influence price increases.”
For his part, the head of global market strategy at Natixis IM Solutions explained that it is very likely that the ECB "will raise its main refining rate to 3% by the end of the year because a lower level is not credible in the face of current inflationary dynamics." Furthermore, this analyst also added that looking ahead to 2023 the ECB "will have to choose between the fight against inflation and financial stability, especially in terms of economic growth and in a high-risk environment."
