ECB to hike rates again, but outlook brightens

ECB to hike rates again, but outlook brightens

European Central Bank president Christine Lagarde said last week the eurozone economy will fare 'a lot better' than previously feared
European Central Bank president Christine Lagarde has said the eurozone economy will fare 'a lot better' than previously feared. Photo: Daniel ROLAND / AFP
Source: AFP

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The European Central Bank is expected to push on with its inflation fight Thursday with a fresh rate hike, even as signs grow the eurozone might have passed the worst of an economic shock.

After Russia's invasion of Ukraine sent energy and food costs soaring across the single currency area, the ECB embarked on the most aggressive cycle of monetary policy tightening in its history.

Since July, it has lifted interest rates by 2.5 percentage points to tame consumer price growth -- which peaked at 10.6 percent in October, over five times the bank's target.

While still high, inflation has started slowing, fuelling hopes that the Frankfurt-based institution's efforts are bearing fruit.

A flurry of recent data, including a key survey showing Europe's economy has started growing again, have even raised hopes that the eurozone will avoid a sharp downturn.

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But ECB president Christine Lagarde has repeatedly stressed rates will continue to rise at a steady pace, and the bank is expected to agree on a 50-basis point hike Thursday.

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That would be the same as the increase when the governing council last met in December, but below two massive hikes of 75 basis points at its two prior meetings.

"The reason for a 50 (basis point) rate hike is clear: the ECB's job is far from done," said ING economist Carsten Brzeski.

Less gloom and doom

Still, recent, less gloomy data has given cause for hope that Russia's efforts to strangle crucial gas supplies to Europe may not trigger the economic shock once feared.

As Moscow slashed deliveries following its invasion of Ukraine, European governments rolled out relief measures to cushion consumers and businesses from surging prices, and rushed to fill up storage facilities.

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Wholesale gas prices have been easing while relatively mild winter weather has meant supplies have not been used up as quickly as expected.

The closely watched S&P Global Flash Eurozone purchasing managers' index (PMI) rose above 50 in January.

That reading indicates growth, and fuelled optimism that slowing inflation and easing supply chain problems, as well as the reopening of China's economy, may offset the fallout from Ukraine.

And in its latest forecast last week, the German government predicted Europe's biggest economy would narrowly avoid a recession in 2023, revising an earlier estimate from October that there would be a shallow contraction.

After months of doom and gloom, officials are striking a more positive note about the outlook in the 20-nation club.

Speaking at the World Economic Forum in Davos earlier this month, Lagarde said the eurozone economy will fare "a lot better" than initially feared, with the news "much more positive in the last few weeks".

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Look to the future

In the United States, the Federal Reserve is also expected to hike rates again at the end of its meeting this week.

Like the ECB, it has been slowing its hikes as the outlook brightens, and there are expectations it may downshift again, from a 50- to a 25-basis-point increase.

While the ECB has stressed it will "stay the course" to bring inflation back to target, policymakers are walking a fine line -- seeking to tighten enough but not so much that it dramatically deepens economic pain across Europe.

Most analysts also expect a 50-basis point hike in March but, with inflation starting to ease, there are already signs of a debate among policymakers about when to slow the pace.

ECB board member Fabio Panetta, known for his dovish stance, said the bank should not commit to any particular hike beyond the forthcoming meeting.

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Others, such as Joachim Nagel, the head of Germany's Bundesbank central bank, have backed further hikes going forward, Der Spiegel magazine reported.

All eyes will be on Lagarde's comments after the rate decision is announced for hints of a future direction.

"The focus of the meeting will likely be the rates guidance beyond February -- will 'steady pace' and 'significant' rate rises stay?" said HSBC in a note.

Source: AFP

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