Here are the ECB’s next moves
ECB: rise of 25bp, but the tone remains hawkish. Commentary by Martina Daga, Junior Macro Economist, AcomeA SGR
The ECB decided to raise the reference rates by 25bp at yesterday's monetary policy meeting , marking a slowdown in the rate of increases from the previous 50bp, and thus bringing the depost rate to 3.25%, the refinancing rate to 3.75% and the marginal lending facility rate at 4%. Since the start of the hike cycle in July last year, the ECB has raised rates overall by 375bp. The forward guidance is clear that the hike cycle has not yet come to an end and that future decisions will remain completely dependent on the data. The propensity for future increases remains, the press release in fact reports that future decisions will ensure that rates reach a sufficiently restrictive level to guarantee a return to the inflation target.
THE RESTRICTIVE MONETARY POLICY BEYOND THE RATE RISE
Attention was focused on the main ancillary tool, with respect to the rise in the reference rates, in the restrictive monetary policy, the Quantitative Tightening. It has been reported that from July 2023 reinvestments of maturing APP securities will be stopped. Until the end of June, in fact, the ECB had already undertaken not to reinvest an average amount of EUR 15 bn/month of maturing securities of the APP program, today it was communicated that the measure will be tightened in the second half of the year . The ECB has decided to communicate the decision on the future of the QT already now in order to make its development predictable. For the moment, however, maximum flexibility of the PEPP remains at least until the end of 2024.
THE MACROECONOMIC SCENARIO STILL TOO STRONG
The level of price growth in the Euro area is still very strong and the flash data of the harmonized inflation indicator for the Euro area in April confirms this. The growth momentum is still very strong, with core inflation mainly supported by the growth in the price of services, on which wage dynamics play a significant role. The labor market in the Eurozone was defined as still too strong during the press conference, with the unemployment rate in March reaching an all-time low of 6.5%. Wage dynamics are on the rise, driven by workers' demand for compensation in the face of loss of purchasing power.
In this context, inflation expectations remain anchored to the target, the survey conducted among consumers indicates that expectations are for a value of inflation equal to 2.4% in three years, down from the peak of 3% reached in December.
The Bank Lending Survey published by the ECB on 2 May, on credit conditions conducted among banking institutions in the Euro area, signals a move in the right direction, showing that the transmission mechanism of monetary policy has strengthened in the first quarter of the year. The survey signals a further tightening of lending standards, in line with the previous quarter and, of particular relevance, that demand for credit by businesses has collapsed further, mainly due to the high level of interest rates . These developments received very positive comments during the press conference, signaling the effectiveness of the monetary policy transmission mechanism through the banking channel.
Is the interest rate level reached sufficiently restrictive? Not yet: during the press conference, Lagarde stressed that there is still a long way to go to bring inflation back to 2% and that the ECB is not yet ready to stop. The macroeconomic context is still very strong, which forces the ECB to continue to maintain a hawkish tone.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/ecco-le-prossime-mosse-della-bce-3/ on Sun, 07 May 2023 05:44:08 +0000.