November 29, 2022

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European Central Bank meeting, new rate hike to 2.0%: what to expect

L ‘Euro-zone We are expecting a new “Saqr” move European Central Bank meeting On Thursday 27 October.

Last month, the central bank’s board of governors raised key interest rates by 75 basis points, In an unprecedented move, many observers now expect him to repeat the same decision at the two-day meeting. In this way, the bank’s interest rate will rise to 2.00% And those deposits in1.50%.

Households and businesses are bracing for a bleak winter as Russia continues to restrict gas supplies to Europe, raising fears of power shortages and smashing record-breaking electric and heating bills.

The point is that, like other central banks, the European Central Bank uses a number of Rising prices To keep inflation in check, with the risk of economic activity slowing to the point of causing deflation.

in Euro-zoneAccording to the latest updated data, consumer prices rose to 9.9% in September, an average of 10% in Germany alone. However, one can be seen on the horizon Recessionor at any rate deflation, as Lagarde herself proclaimed in some intervention.

With these places, the European Central Bank meeting on October 27 Expected and could rock the markets: what to expect?

ECB ready to raise rates by 0.75%: expectations

there European Central Bank It will act to raise interest rates another significant amount to tame record inflation, and shed political pressures that suggest moving ahead with greater caution as the eurozone approaches recession.

Since the September policy meeting, when the European Central Bank raised interest rates by 75 basis points, headline inflation has been stronger than expected, reaching a record high of 9.9%. At the same time, new signs of rising inflation expectations are emerging, heightening the risks of a wage-price spiral.

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to me Frankfurt So the desire to show determination in the fight against such a staggering and constant price increase seemed obvious. The message must be unequivocal: the central bank, whose very aim is to keep inflation in check, cannot fail to act or make mistakes in assessing this persistent – and no longer temporary – rise in inflation.

Inflation expectations that exceed the 2% target European Central Bank They would be the strongest argument for aggressive tightening, even among political doves. “We will also have to pay attention to the possibility that inflation expectations in the medium and long term will not hold above 2%.” Spanish Central Bank Governor Pablo Hernandez de Cos said last month. “In the coming months, we will remain very vigilant about these indications.”

Investors and economists are now betting on the second move 75 basis pointswhich will not be welcomed by some governments that have warned the European Central Bank of interventions that could further dampen growth.

Lagarde He is among those politicians who have warned that rates may need to rise to levels where they are actively curbing the recovery. In fact, higher rates make loans from households and firms more difficult and, accordingly, circle demand, investment, and consumption.

Moreover, if Russia completely cuts off gas flows to Europe, the eurozone economy could shrink by about 1% in 2023, ECB Vice President Luis de Guindos added some time ago.

It’s a scenario that became more likely after Moscow cut gas flows through the crucial Nord Stream 1 pipeline to Europe’s largest economy, Germany, in late August.

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Not just prices: what will the European Central Bank decide?

The European Central Bank is also expected to use this week’s meeting to discuss alignment of other monetary policy tools with efforts to contain inflation.

Policy makers are likely to consider changes in loans Very affordable in the long run (TLTRO)loans at subsidized rates provided to banks in recent years to help the Eurozone weather various crises, sometimes at negative rates.

The bank may also consider how best to cut its multibillion-dollar balance sheet after years of buying government and corporate bonds. But given the uncertain outlook and the risk of financial market turmoil, analysts say the start of any “quantitative tightening” is rather far away.

All these reasons combine to make the October 27 ECB meeting very interesting, especially in terms of the impact on the markets.