Will the ECB Hike Rates by 25 or 50 Points?

At 15:15 (GMT+3) on Wednesday, the European Central Bank will be making its interest rate decision. The central bank is expected to hike rates, the first time it will do so in 11 years. For the past 8 years, interest rates in the EU have been negative – but rampaging inflation has made the European Central Bank re-look its monetary policy. The European Central Bank has signalled a 25-point (0.25%) hike in the coming decision, and a 50-point hike in September.

However, sources close to the matter have said that a 50-point hike is also on the table for 21 July as the inflation outlook has been declining rapidly. However, unlike in the US, monetary policy in the EU is slightly trickier due to the chance of fragmentation risk between EU member nations.

The 50-point hike will come with a bond-buying safety net for highly indebted eurozone member countries to cap their borrowing costs. This includes countries like Spain, Italy, and Greece. 

Support for a 25-point hike decision includes the fact that the EU’s CPI for June came in as expected, at 8.6%, as well as a Reuters poll of economists, where all but one said that they expected the EU to stick to its guidance. 

Post-Market

Money markets priced in a 60% chance of a 50bps hike on Tuesday, with the euro hitting as high as $1.0269. However, the euro has settled down to the $1.0205 area as the markets await the European Central Bank’s decision. 

Ahead of the decision, the Dollar Index has also retreated from the $107 level seen earlier this week before advancing to trade at its current price of $106.79.

The European Central Bank lagging behind the Fed’s aggressive monetary policy has seen the euro hit parity with the dollar last week, and some analysts fear that continued dollar strength – and euro weakness – might result in a so-called “doom loop”, where a weaker euro feeds into a stronger dollar, increasing manufacturing costs and creating a vicious cycle.

However, the EU also has another vulnerability in addition to fragmentation: its reliance on Russian energy. “A gas shutdown would not only hit growth but would also boost inflation and therefore the European Central Bank may not immediately become more growth sensitive,” JP Morgan economist Greg Fuzesi said.

The European Central Bank Interest Rate Decision will be released at 15:15 (GMT+3) on Wednesday, 21 July, and investors are also advised to pay close attention to a speech by bank president Christine Lagarde later at 17:15. As a friendly reminder, do keep an eye on market changes, control your positions, and manage your risk well.