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Will the ECB Hop on the Fed’s Hawkish Rates Bandwagon?

Plus500 | Thursday 27 October 2022

Due to the undeniably rising inflation around the world, fears of a recession, and the ongoing war in Ukraine bringing with it economic woes in Europe, many investors and traders may be waiting for today's ECB meeting with bated breath. So what exactly is the ECB, what are the prospects of today's meeting, and what is the latest economic update in the Eurozone? Here’s what you need to know:

Today's ECB Meeting

What Is the ECB?

Similar to the Federal Reserve’s central banking system in the US, in the Eurozone, there’s the ECB. The ECB, short for European Central Bank, has been the European Union’s (EU) central bank since 1999 and is located in Frankfurt, Germany. In other words, the ECB is responsible for keeping economic stability and inflation under control in the Eurozone (EZ) which includes 19 European countries that have embraced the euro as their currency.  

Each month, three national central bank governors rotate with six members of the ECB's executive board to determine monetary policy. Moreover, since the ECB's key objective is price stability, to prevent economic destabilization through deflation, the central bank aims for 2% inflation over the medium term. With that being said, the ECB will hold a meeting today to tackle inflation and the aforementioned economic headwinds in the Eurozone and the decision it delivers may have a noteworthy impact on the markets. (Source:ECB)

European Economy: A Brief Recap

It is no secret that the Russian invasion of Ukraine has brought with it devastating repercussions both to human lives and also to the economy. This is because, in an attempt to halt Putin’s army from further advancing into Ukraine, Europe and the US have been imposing financial sanctions on Russia since February. These bans include prohibitions on Russian energy sources and Russian hi-tech companies. 

According to these sanctions, as of December, the EU will not accept Russian oil imports from the sea, and in February of 2023, it will also prohibit Russian refined oil products from being imported. Furthermore, the EU has already halted the importing of Russian coal, and Germany, in particular, has blocked plans to open the Nordstream 2 pipeline from Russia. 

As a result of these sanctions, since Russia is considered the EU’s largest energy provider and as the merciless winter looms larger in Europe, the ECB finds itself faced with a tough mission. On the one hand, the central bank has to tackle inflation, and on the other hand, it has to keep energy prices from skyrocketing. Consequently, the European Commission is expected to unveil a plan to find a middle ground between those who advocate for a gas price cap and those concerned it will further starve businesses and industries. 

To make matters worse, in the past few months, as the US Federal Reserve attempted to combat inflation with aggressive interest rate hikes, European stocks struggled to keep pace and slid. Nonetheless, as of recently, on Tuesday, European stocks seemed to be rising on hopes that the Federal Reserve may take down its rate hiking policy a notch according to some market analysts. (Source:BBC)

Today’s ECB Meeting Outlook

Today, the ECB is expected by many market watchers to adopt a similar tone to the Federal Reserve, which has been known for its hawkish monetary policy in the past. In view of this, many speculate that the European Central Bank may raise its interest rate by 75 basis points to tame inflation, which some say will last until 2023.

If the ECB indeed opts for a 75 basis points rate hike today, similarly to the Fed’s last rate hike in September, then this would be the former’s second successive large hike and the third of the year which might end up taking a toll on the European economy. It is also believed that ECB President, Christine Lagarde, might share some information about how the ECB intends to shrink its balance sheet, which has grown from €2 trillion in 2010 to a whopping €8.8 trillion in 2022. (Source:CNBC)

What’s Next?

Several market analysts have noted that the global economy, in general, and the European economy in particular, may be under tremendous pressure, and a recession may be imminent. Therefore, if the ECB hikes rates aggressively today, these fears may end up amplified. In addition, while the September inflation rate was 10%, analysts expect another 50 basis point hike in December due to rising inflation which may further boost the fears of a recession. 

Nonetheless, whether these predictions will materialize is yet to be determined, investors and traders will have to wait and see how today’s ECB meeting turns out and hear what Lagarde has to say. Additionally, seeing if the Fed will indeed tone down its rate hiking speed as some claimed will only be determined next week in the FOMC’s meeting which is scheduled for 1-2 November.

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