ECB: The process to neutral policy rate

While the inflation pressure and recession threats are waiting at the door, the European Central Bank is preparing to increase interest rates for the first time in a long time. Although the weighted expectation is that the central bank will increase all three main policy interest rates by 25 bps, we observe that there is a market view that goes around the 25-50 axis. Although the Board of Directors is expected to increase the rates in October, December, February and March, more than 50 bps increases from the current period until June 2023 are unlikely and we think that the recession risks limit the ECB’s hand.

The assessment of risks to the inflation and growth outlook will be monitored to provide clues about the direction of policy. The Governing Council’s heavy focus on current inflation and the risky price acceleration in June could cause hawkish language to be used. The Governing Council could offer further comments on the eurozone’s neutral policy rate forecast to limit medium-term interest rate expectations. Although this will allow for the formation of a foresight threshold just like the Fed, it is debatable whether this is the priority of the ECB.

ECB assumed neutral policy rate development

The European Central Bank is also preparing to announce its new crisis management tool. There is upward pressure on the bond yields of the countries and it is clear that the European bond market will not be considered safe enough when we consider the risks of energy crisis, Italian government crisis and recession. The German-Italian bond spread is rising towards its previous high. Italy is expected to move towards a government crisis and snap elections if Draghi resigns, but the economy and the market really don’t seem ready for that. It is a situation that will question the perspective of increasing interest rates at the ECB meeting, because a spillover control mechanism is being created on the current axis.

With a more hawkish message on monetary tightening, we can also expect more upside pressure on bond yields. We dwell on the multidimensional problematic concerns of the ECB’s multiple rate hikes of 50 basis points and think that such a tightening will not be permanent. The ECB’s moves should depend on developments, so the fact that the ECB may continue to raise interest rates as the economy plunges into an energy-driven recession from the fall contains details that should be viewed with great skepticism. In an environment where the Fed is assessing 75 or 100 basis points, the ECB needs to consider whether a rate hike will be necessary and will work, not whether it will be 25 basis points or 50 basis points.

Kaynak Enver Erkan / Tera Yatırım

Hibya Haber Ajansı