Economists expect the European Central Bank (ECB) to raise interest rates by 25 basis points to 2.5% next week. However, they do not expect any further increases after that. This view is different from market expectations, which are pricing in three more hikes by mid-2024, according to a Bloomberg survey.
Key Details
This difference highlights the ECB's challenge in managing monetary policy during rising geopolitical tensions and changing energy prices. Oil prices are nearing $100 per barrel. At the same time, natural gas prices have surged to levels not seen since earlier this year. Ken Egan, director of Kroll Bond Rating Agency Europe, said, "The ECB is likely to present a 25 basis-point hike as a necessary step." He added that the bank will likely avoid signaling further hikes, focusing instead on data and inflation expectations.
Background
Despite inflation hitting a three-year high, economists say businesses and consumers do not seem to be preparing for stronger price pressures. Most survey respondents showed only mild concern about potential impacts on wages and prices. Isabel Schnabel, an ECB Executive Board member, stressed the need to prevent second-round effects from inflation. These effects could lead to a stronger response from the bank. Austrian Governing Council member Martin Kocher mentioned that clarity on these effects will come in the next few months.
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The expected ECB rate hike could affect eurozone bond yields and the euro. Traders will adjust their positions based on the ECB's monetary policy. Investors are likely to keep an eye on energy prices and inflation data, as these will influence market sentiment.
Watch for the ECB's interest rate decision on Thursday. This decision will clarify the central bank's stance amid current economic conditions.
Based on reporting by: businesstimes.com.sg