Today the ECB will deliver its much-anticipated monetary policy decision. The Euro (EUR) has managed to rise against the US dollar (USD) on Thursday, while the EUR/GBP is expected to remain volatile and potentially reach Wednesday’s high if the ECB hikes rates.
A dilemma?
The ECB has delivered nine consecutive rate hikes, but inflation remains stubbornly high, with prices to continue to rise and start falling towards the bank’s target of 2% in two years. But higher borrowing costs across major economies and China’s economic troubles have hurt growth and increased the chances of a Eurozone recession.
Analysts and investors may have leaned towards a pause in the ECB’s hiking cycle, but Reuters reported on Tuesday that the central bank was planning to raise its inflation forecast next year to more than 3%, supporting the possibility of another rate hike. Danske Bank economist Piet Haines Christiansen expressed the view that “The inflation momentum is simply too strong for the ECB to pause.”
ECB interest rate decision
So, the decision remains uncertain. A number of analysts expect the bank to pause its rate hiking path, while others anticipate a 25-basis points rate hike, an outcome which will offer support to the single currency.
A potential pause in the bank’s hiking cycle can be justified by the continuing deterioration of key fundamentals in Germany and the broader Eurozone area, while inflation remains elevated and higher than the bank’s target. There are also worries regarding the bank’s over tightening which coupled with rising stagflation concerns should support a probable hold by the ECB.
How will the euro react?
Analysts have noted that a 25 bps hike and a clear indication of a pause would risk leaving the Euro trading in a range, but if the ECB doesn’t take any action then the euro will fall.
Economists at don’t expect any further rate hike and that as a result, the deposit rate will have peaked at 3.75%. However, they anticipate that today’s decision will be tight, as some hawks on the Council have supported rate hikes until now.
Overall, the market sees a high likelihood that the ECB might cut interest rates again next year. So, it is possible that the ECB will hike the key rate again today, and then send out a signal next year and cut interest rates at least once to support the economy. However, core inflation remains persistently high, so Commerzbank economists don’t expect any ECB rate cuts in 2024. They have noted that it is difficult to predict how the euro will act today, so they believe it is best for those trading today to hedge the side that will be most painful and to wait and see what today’s meeting will bring in the end.