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ECB Plans First Rate Hike in 11 Years

ECB Plans First Rate Hike in 11 Years

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Markets are awaiting the outcome of the European Central Bank’s discussion of its first rate hike in 11 years. The cost of living is climbing in Europe, with euro zone bond yields jumping on Tuesday morning and the euro reaching an almost two-week high that day, CNBC wrote, citing Reuters, who reported that the ECB would decide on a 50 basis point hike instead of 25 as planned.

Undisclosed inflation expectations?

A team of experts from Deutsche Bank commented that the ECB might want a 50bp hike because of undisclosed inflation expectations. They also suggested the increase might help negotiate the details of a strong anti-fragmentation tool, noting that the latest stimulus plan would target rising debt yields in Italy and other peripheral countries.

As Italy faces another political crisis with its prime minister stepping down, the sector will watch the details of this new anti-fragmentation tool closely.

The monetary union’s integrity is at risk

Dirk Schumacher of Natixis told CNBC in a research note that ECB President Lagarde would emphasize her institution’s determination to protect the integrity of the monetary union despite her focus on the temporary nature of the instrument. In his opinion, she will have to walk a fine line, especially given the political situation in Italy. If this fails, the risks of misunderstandings and erratic market moves increase.

Signs of tentative improvement

The ECB’s main concern is price stability. The formidable rate hike and the new tool both come against this backdrop. In June, producer costs in Germany were almost a third higher than the same month last year, and the euro zone inflation print rose from 8.1% to 8.6% between May and June.

Things may be looking up though. An analysis of recent data by Commerzbank showed interim goods prices haven’t risen as sharply as before with the exception of energy. Bank analysts wrote:

Here, the year-on-year comparison fell for the second month in a row, due among other things to somewhat lower prices of metals. As intermediate goods are ahead of consumer goods prices in this cycle, this gives rise to hopes that the latter will also peak in the coming months.

Uncertain outlook on gas supply

At this stage, the economic outlook is very uncertain. Gas disruption risk is very likely to increase in the next few weeks. Europe is getting ready for a lengthy shutdown of Russian gas supplies as maintenance work on the Nord Stream 1 pipeline continues. This pipeline transports gas from Russia to Germany via the Baltic Sea.

Insiders worry that delivery suspension might continue for more than 10 days as initially planned. This might put a dent in the region’s winter supply.