Post-ECB crisis balancing phase

After the ECB statements While the ECB rate increased by 50 basis points above the expectations, Lagarde gave signals that more rate hikes are expected. While it seems like a classic central bank action and guidance, the point that changed the perspective was that the ECB will not raise neutral rates, so the speed of tightening and the destination point are different issues. Of course, there was a new spread control mechanism called “Transmission Protection Instrument (TPI)” that softened the effect of rate hikes.

Data-driven approach Lagarde changed the perspective of September, which was stated in the last meeting that there might be a higher rate hike, by saying that the decisions of the Board of Directors will depend on the data. September is a critical period because winter is approaching in Europe and the possible economic slowdown effect of the possible energy crisis may deepen as heating demand and industrial demand are intertwined. It seems that Europe will most likely go into recession. It is difficult for the ECB to sustain double-dose rate hikes, and inflation, which is highly dependent on commodity prices, is hard to come down with the effect of rate hikes.

Comparison of ECB deposit rate and Eurozone CPI

TPI mechanism In addition to the rate hike, the ECB also approved the Transmission Protection Instrument (TPI), which aims to support regular conditions in the Eurozone government bond markets, particularly in the fundamentally weaker peripheral markets such as Italy and Spain. On the TPI front, although full details are not yet available, the ECB said that purchases using the intermediary were not previously capped, and the scale of TPI purchases depended on the severity of the risks facing the policy transfer.

Conclusion? Of course, after Thursday’s big rate hike and TPI approval, the focus is now on what happens after the European Central Bank. Comments in Thursday’s resolution on a “front-loading” exit from negative interest rates and a shift to a “meeting-by-meeting” approach to interest rate decisions hint at at least some potential for a move forward to smaller 25bps increases. As a matter of fact, Lagarde also said that the previous guidance on interest rate action for September is no longer valid.

Kaynak Enver Erkan / Tera Yatırım

Hibya Haber Ajansı