Alexander DeMarco, the Governor of the Central Bank of Malta and member of the Governing Council of the European Central Bank (ECB), crossed the wires on Tuesday, saying that “stronger core inflation” could be a reason for the central bank to act, saying that he supports a rate hike in October.
In the September 10 meeting, the ECB decided to lift rates in the three key ECB interest rate facilities by 25 basis points, mentioning that the “Middle East continues to generate inflation pressures, and inflation is set to remain well above target for an extended period.”
As of writing, money markets have priced in a 57% chance that the ECB will hold rates unchanged at the October 29 meeting, while the odds of a December rate hike are 84%, according to Prime Terminal.
Key highlights:
Stronger core inflation could be grounds to act
I would not exclude a rate hike in October
Recent rise in L-T bond yields quite worrying
The economic situation is quite fragile.
ECB FAQs
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy for the region.
The ECB primary mandate is to maintain price stability, which means keeping inflation at around 2%. Its primary tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger Euro and vice versa.
The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.
In extreme situations, the European Central Bank can enact a policy tool called Quantitative Easing. QE is the process by which the ECB prints Euros and uses them to buy assets – usually government or corporate bonds – from banks and other financial institutions. QE usually results in a weaker Euro.
QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The ECB used it during the Great Financial Crisis in 2009-11, in 2015 when inflation remained stubbornly low, as well as during the covid pandemic.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the European Central Bank (ECB) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the ECB stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Euro.
