© Stocksak. FILE PHOTO – The European Central Bank logo in Frankfurt (Germany), January 23, 2020. REUTERS/Ralph Orlowski/File Photograph
LONDON (Stocksak – The European Central Bank increased interest rates on Thursday. It indicated that it was eager to shrink its overstretched balance sheet and took another major step in tightening policy in order to combat an historic rise in inflation.
The ECB cut a key bank subsidy, but didn’t mention plans to wind down its bond holdings. After accumulating trillions of euros worth of debt from eurozone governments since 2015, the ECB has been unable to stop its bond holdings.
The euro fell to a session-low level after the decision. It was last down 0.7% at $1.0005.
Germany’s 10-year Bund dropped 2.5 basis points last day to 2.09% versus 2.195% prior to the decision. However, the pan-European Index remained lower at 0.35%.
JACK ALLEN-REYNOLDS, SENIOR EUROPE ECONOMIST, CAPITAL ECONOMICS, LONDON:
“The ECB is very likely to follow today’s 75 bps rate hike with further aggressive increases in the coming months, even if we are right that the forthcoming recession will be deeper than most expect. It is possible to view the decision to not announce QT but to continue the guidance for APP reinvestments as somewhat dovish. But with policymakers openly discussing QT, it wouldn’t be surprising if an announcement came at the next meeting in December.”
PIET CHRISTIANSEN CHIEF ANALYST DANSKE BANK COPENHAGEN
“I think the market rally is due to indications of a slowing rate hike pace but also that we didn’t have any changes to the QT wording. This is the one that I find most surprising.
VIRAJ PATAL, GLOBAL MACRO STRATEGIST VANDA RESEARCH LONDON
“The ECB is on the edge of a dovish turn. It’s clear that this is a central bank that wants to front-load rate hikes to control inflation. But they are also mindful that they don’t control much external growth or market factors that could disrupt the hiking cycle.
“The slight dovishness to the statement is evident in the knee-jerk response of lower swap rates. But worth remembering that this is still a central bank that will hike aggressively in the face of a recession – and the only thing that will stop them is if they see the whites of eyes of either (a) lower inflation or (b) a market crisis. If that doesn’t happen, then continue to expect front-loaded hikes from the ECB… and even another 75bps in Dec.”
JEREMY BATTONE-CARR EUROPEAN STRATEGIST RAYMOND JAMES:
“The European Central Bank is in a difficult spot as it tries to control inflation without causing economic damage. They have decided that potentially triggering a recession in the region is necessary to stop spiralling inflation.
“The euro zone faces challenges that will be familiar for much of the rest, with headline inflation running at a 10% annual rate, five times the target level. As part of its core mandate to ensure price stability, the ECB raised its base rate by 0.75 points. The attempt to cushion the blow to businesses and households from rising costs is likely not to cause problems elsewhere. It will put a significant downward pressure on the economy by dramatically increasing the cost to borrow.
CHRIS SCICLUNA, HEAD OF RESEARCH DIVISION, DAIWA CAPITAL MARKETS, LONDON:
“They’ve dropped the reference to the next several meetings in the statement (they had previously said over next several meetings the Governing Council expected to raise interest rates further), which is probably an indication of a slower rate increase in December.
“The TLTRO decision is a questionable one – the change in the terms and conditions after the events raises question marks about predictability on policy moving forwards. It would be reasonable to assume that they would use a tool such as this in the future given the current downturn. They might also play with the terms and condition, which could make it more difficult, but we’ll look at the details later.
ALTAF KASSAM EMEA HEAD of INVESTMENT STATEGY and RESEARCH, STATESTREET GLOBAL AVISORS, LONDON
“This action shows that the ECB continues to respond to criticisms of falling behind, especially with regard to the Fed, as well as growing calls for the need for a floor to the euro in an effort to keep a check on the excess imported (especially energy price), inflation it has brought about.
“That being said, the second 75 bps move places the deposit rate in the middle of the 1-2% range of neutral rates that ECB officials have cited. This should be a natural point to slow the pace of hiking given high likelihood of a eurozone recession in Q4. As a result, we expect the ECB to slow its pace of rate rises, hiking ‘only’ another 50 bps in December – yielding a deposit rate of 2% by year-end.”
BEN LAIDLER, MARKET STRATEGIST, ETORO, LONDON:
“The market price was set by consensus on the TLTRO changes, and the 75 bps hike.
“Focus is on the press conference, because market expectations are rising about the Fed’s easeback on rate hikes… so people will be reading the tea leaves very carefully to what Lagarde has to say for the possibility of a deceleration.
“I think we’ve probably got another 75bps hike at our next meeting, but markets will be very careful to examine the guidance for what’s coming after that.”
CARSTEN BRZESKI GLOBAL HEADER OF MACRO ING FRANKFURT
“In just over three months, the ECB increased interest rates by a total 200 basis points. This is the most aggressive and aggressive hike cycle ever.
“At this moment in time of high uncertainty and looming recession, normalizing monetary policies is one thing. However, moving into restrictive territory with monetary policy another. With today’s rate hike, the ECB has come very close to the point at which normal could become restrictive.”
NEIL BIRRELL CHIEF INVESTOR OFFICER, PREMIERMITON INVESTORS GUILDFORD UK:
“The ECB increased rates to 1.5%, exactly as expected, and has said they are going higher, which shouldn’t be a surprise given that inflation is almost 10%. Everywhere you look, central banks will be analyzing the economic data and taking the right decisions. They won’t want to overdo it and damage their economies more than they have to. But, let’s be clear, inflation is the primary fear, not recession, and beating it is the most important battle to win. For now, it’s difficult to see what level the ECB will see peak rates reaching.”
MARCHEL ALEXANDROVICH EUROPEAN ECONOMIST SALTMARSH ECONOMICS, LONDON
“It (the rate decision is) broadly in line with expectations, and the ECB is signalling that more rate hikes are required.
“The balance sheet is what’s most interesting to us and where normalisation goes. Although there isn’t a lot of money here, they want to make it less appealing for banks to borrow money from the ECB and then park it back at them. They are urging banks to pay off their TLTRO loans as soon as possible.
“They have been increasing rates since July, and now they are saying that they are ready to drain liquidity from the system.”
MICHAEL HEWSON CHIEF MARKET STRATEGIST CMC MARKETS LONDON
“At the end of the day there may be a softening of the tone from the ECB, certainly the sell-off in the euro would appear to suggest that they’re not going to go as aggressively over the course of the next few months.
“The devil will be in details,” says I. But certainly the tone of it suggests they’re may be getting nervous about over tightening and the initial reaction would appear to suggest that perhaps we may not get 75 basis points in December.”