This was officially announced by the ECB on June 9th. On July 21 – exactly in 14 days – the base rate will be raised from 0.00 to 0.25 percent when monetary policy is decided. ECB President Christine Lagarde insisted on June 9 that the intention was to introduce rate changes with a small step, so to speak, with caution. On June 9, the ECB announced that it would raise interest rates by 0.25 and 0.50 percentage points respectively for September.
Euro crashes – ECB remains inactive – USA raises interest rates much more than the euro area
The problem with this is that the United States has already raised interest rates faster and will hike interest rates again more rapidly by 0.50 and 0.75 percent in the week after the ECB decision in late July. . The strong strength of the US dollar reflects the pull of the capital market towards the dollar area. The euro has fallen further recently and is currently at its lowest level since 2003 at less than 1.02 against the US dollar.
The lower the euro, the greater the effect of imported inflation (explained here) on consumer prices in Europe. The weaker the euro, the more expensive European importers have to buy oil on the world market, for example. Of course, they pass these higher purchase prices on to the end consumer along the value chain. The ECB fails to stem this rising inflation by modestly raising interest rates by 0.25 percent on July 21st. Because the move has been priced in on the capital markets for four weeks since it was officially announced by Christine Lagarde.
Only a remarkably sharp interest rate hike by the ECB could possibly bring the euro back to life. But it is how it is. The ECB under Lagarde and Draghi has not previously been gifted with the flexibility, speed or commitment when it comes to raising interest rates. Above all, the ECB gave vague support for the heavily indebted southern states of the euro zone, which should take out loans as cheaply as possible. If interest rates are raised too quickly and too quickly, these countries’ financial costs will quickly become more expensive.
The TradingView chart shows the US Dollar Index, which has been steadily rising for the past 12 months (brown), against the EUR (blue line) and the EUR (blue line), which has been steadily falling for the past 12 months.
Big disappointment on July 21st
It can be assumed that the ECB will only raise the key interest rate by 0.25 percentage points on July 21, as announced. Since he announced it four weeks ago, the world has evolved. Inflation in the euro zone, which was still 8.1 percent in May, rose by 0.50 percentage points to 8.6 percent in June! And that small rate hike would then disappoint the market. A really strong answer to the inflation problem is missing. And there may be some hope in the market that the ECB will signal an even bigger rate hike on July 21st. But I suspect Christine Lagarde will remain dormant two weeks from now and will be slow to raise rates.
What can logically play into the ECB’s cards
If one believes that the ECB is indirectly and informally helping southern countries with lower interest rates, there is currently a good argument that could prevent the central bank from raising interest rates by more than 0.25 percent. Is. Because, as the following charts show: Due to the looming recession in Europe, inflation could also ease. because market-oriented Inflation prospects for ten years This has fallen by 3 to 2 percent in the past few weeks. The ECB may argue: Look, there’s a recession, inflation expectations are coming down – if we raise rates too quickly now, we’re only going to exacerbate an economic slowdown.
This should provide the ECB with the argument it needs to raise interest rates only minimally on July 21, as already mentioned, and there is no sign of a major rate hike. The current energy crisis (gas and electricity prices are skyrocketing) and currently rising import inflation are currently adding to massive inflationary pressures, although the long-term inflation outlook looks different.
Good morning from #Germany Where #Recession The fear increases. Growth forecasts for 2022 have already dropped from 4.5% to 1.7%. There is also a risk of a recession on the bond market. 10-year German dam yields have fallen from around 1.9% to 1.2%. pic.twitter.com/2mYKdzwKwy
— Holger Zaschaepitz (@Schuldensuehner) July 7, 2022
German 10y #Inflation Expectations have collapsed as stagflation fears now outweigh recession concerns. pic.twitter.com/dNenE9mhKg
— Holger Zaschaepitz (@Schuldensuehner) July 7, 2022
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