In 1998, a monetary union was achieved, though took full effect in 2002, when 12 members started using Euro as a single currency. Last week, revised data showed that the eurozone had slipped into recession as the rising cost of living dampened consumer spending. Economic output shrank by 0.1% in the final quarter of 2022 and the first quarter of 2023, according to official data from Eurostat. A technical recession is generally defined as two consecutive quarters of negative growth. Expectations for further UK rate hikes meanwhile have shot up this week after Tuesday’s jobs data.
The European Central Bank will almost certainly implement the eighth successive increase in its official deposit rate on Thursday, this time by 25 basis points to 3.5%. The interesting bit will be whether it signals it might be ready to at least start thinking about thinking about a pause. Given a welcome downturn in inflation recently and signs that the euro-zone economy is flatlining at best, a hint that https://forexbox.info/ rate hikes are no longer automatic at every meeting would be prudent. The Federal Reserve (Fed) rate decision is on Wednesday and markets are pricing in a pause for the Fed after 10 straight meetings in which it has jacked up its key rate by a full five percentage points in 14 months. The opposite market behaviour will occur if an interest rate cut is decided in line with the forecasts.
What is the key interest rate?
If the inflation levels are off the mark, the bank can intervene in the Eurosystem using interest rates, standing facilities, open market operations, and minimum reserve requirements. The ECB Executive Board enforces the policies and decisions of the Governing Council, and may direct the national central banks when doing so. The ECB has the exclusive right to authorise the issuance of euro banknotes. Member states can issue euro coins, but the volume must be approved by the ECB beforehand. With its monetary policy, the ECB is aiming for a 2% inflation rate in the medium term. In other words, it’s trying to keep inflation (i.e. the rate of price increases for consumers) at a stable level.
- This includes authorizing banknotes to be issued, providing bank licenses, and holding and managing the official monetary reserves of the member states.
- ECB President Christine Lagarde said on Monday it was too early to call a peak in core inflation and reaffirmed rates would need to be increased again.
- The Bank Lending Survey and the inflation data for April “add to our conviction that the ECB will dial down the pace of monetary policy tightening this week, to a 25bp hike,” said Pantheon Macroeconomics economist Claus Vistesen in a note.
- The deposit interest rate, also known as the deposit facility, is the interest on overnight deposits.
It should have some help from the Federal Reserve, which is widely expected to pause when it meets Wednesday. All but one of of 66 Bloomberg survey participants expect the Fed to stick at 5.25%. There’s a similar consensus for the ECB decision, with 37 of 38 respondents anticipating a quarter-point increase. The futures market suggests an additional 25 basis points will follow in July — but that might change if ECB President Christine Lagarde is anything other than implacably hawkish this week. After a combined 375 basis points of hikes over the past year, economic activity in the 20-member bloc has slowed, with Europe’s biggest economic engine – Germany – and the euro zone as a whole falling into a winter recession.
Breaking: ECB hikes key rates by 50 basis points in February as expected
This behavior stimulates the economy and increases demand, and companies make more investments, hiring more staff and paying higher wages. The increasing demand for money fuels economic growth and stimulates the stock market. As a result, however, consumer prices also rise and every euro is worth a little less.
Guindos told Bloomberg TV on Wednesday that underlying inflation pressures may prove to be more stubborn than currently expected, with a strong summer tourist season likely to drive services costs higher. In-depth reporting, data and actionable intelligence for policy professionals – all in one https://forex-world.net/ place. “The ECB might not be convinced by the September meeting inflation is declining sufficiently to pause,” he said. The U.S. Federal Reserve, by contrast, is predicted to remain on pause at its June meeting and for the rest of the year, according to a Reuters poll published on Wednesday.
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At the very least, higher interest rates will help slow down inflation as well as securing the worth of your savings. The ECB Governing Council makes interest rate decisions only eight times a year. These rare market events are scheduled in advance and generate numerous high-risk & high-return trading opportunities. Checking the HIPC reports and reviewing the ECB meeting minutes can help to prepare the portfolio for the ECB official interest rate hikes or cuts. The day trading strategy for the ECB rate decisions can be further improved by utilising AvaTrade’s professional assistance and advanced analysis tools. When people talk about the “ECB’s key interest rate,” this is usually what they’re referring to.
The ECB only increases the key interest rate when it has to intervene in a problematic economic situation, such as the currently rising inflation in EU countries. Raising the key interest rate is one of the ECB’s most impactful tools. The increase of the interest rate is not only supposed to slow https://day-trading.info/ down inflation, but also release pressure on low-income households. It’s meant to reduce the amount of money in circulation and to motivate consumers to save their cash instead of spending it on goods or services. This should result in decreased demand and a drop in prices for consumers.
ECB raises interest rates by quarter of a point to tame inflation
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ECB President Christine Lagarde said on Monday it was too early to call a peak in core inflation and reaffirmed rates would need to be increased again. The ECB also decided on Thursday to end reinvestments in its 3.2 trillion euro Asset Purchase Programme from July 1, a widely expected and long-flagged decision that will catch no investor off-guard. This is why a long list of policymakers have already put a July rate hike on the table, with nearly all also saying they were keeping an open mind about September. At 6.1%, inflation is already well below double-digit readings from last autumn and a recession, along with sharply lower commodity prices, will cool price growth quickly over the rest of the year. Round one was carried out on 21 December, when banks took €489 billion from the European Central Bank. The loans are due to be repaid within three years at a rate of 1%, and a second round will be launched on 28 February, with the results of how much money was requested due on 29 February.
ECB raises rates to 22-year high and signals more to come
It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. In BoJ governor Kazuo Ueda’s opinion though, inflation overshooting the Bank of Japan’s target doesn’t mean a rate hike necessarily. The governor already said he needed to see durable wage growth accompany price rises before considering any move. However, if you use an overdraft facility, you should take a close look at it.