Written by Alessandro Albano
Investing.com – The European Central Bank will announce its interest rate decision on Thursday amid high uncertainty in the markets ultimately sparked by the collapse of California’s SVB (NASDAQ:) and the effects on the banking system.
Insiders agree on another 50 basis point increase as already announced by the ECB itself on the occasion of the meeting at the beginning of February, while options remain open regarding the path that Frankfurt will follow in the coming months.
“While it is almost certain that at tomorrow’s meeting there will be a 50 basis point hike in the key refinancing rate by the ECB, what will really matter are the signals about future moves Chair Lagarde will launch,” he writes in a note.Jiro Jung, Chief Economist at Mirabaud AM.
So Mirabaud expects to increase the main refinancing rate by 50 basis points to 3.5%, with the deposit rate at 3% (+50 basis points), but in terms of future guidance, “we expect Lagarde to suggest that in May it will be a move of 50 basis points. More. It could potentially move at 25 pips per second.”
“After May, we still have, in the medium term, a more base scenario doves As far as raising interest rates is concerned, ”the economist points out.
Meanwhile, the markets’ leading indicator of credit risk in the eurozone banking system jumped to its highest level since mid-July, reflecting growing levels of investor panic about contagion risks from the collapse of three US banks in less than a week.
The so-called FRA-OIS, which measures the gap between the eurozone’s three-month interest rate and the index’s overnight exchange rate, jumped to 21.08 basis points this week, reaching its highest level since July 19, 2022.
In this sense, he explains in a separate note Filippo Dudovic, Chief Market Strategist at IG Italia.There was an initial warning signal coming from abroad as a result of the restrictive monetary policies of central banks (in this case the Federal Reserve). Also looking at the reaction of the European markets, especially in the banking sector, we can easily notice that macroeconomic conditions are starting to change.”
According to Dudovic, the task is now “more difficult and difficult” for central banks, as they “have to pursue restrictive monetary policies to combat inflationary pressures (core inflation remains stable at very high and unbearable levels), knowing that tightening will increase the risks of financial instability.” system. A dilemma between price stability and financial stability.
Despite this IG agrees with Mirabaud and expects a 50 basis point increase at the next meeting on Thursday with a position setting that “really depends on macroeconomic data and financial stability in the Eurozone”.
However, the moderator does not expect “any future guidance from Christine Lagarde” regarding decisions “to be made by meeting”, while “communication should remain tight”.
Finally, warns the IG strategist, the risk that the ECB’s communication and tone will be poor or misinterpreted by markets is “extremely high, given Governor Lagarde’s past communication experiences”.
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