Morning Brief – ECB PREVIEW

The euro currency spiked yesterday after the European Central Bank policymakers are considering raising interest rates by a bigger-than-expected 50 basis points.

Attention is now turning to the ECB meeting on Thursday as the central bank of Europe battle to fight record-high inflation, which l

The ECB has signalled that the September move would be a 50bp step ‘If the medium-term inflation outlook persists or deteriorates’. Recently.

At the last meet the central bank said that in September it anticipates ‘a gradual but sustained path of further increases in interest rates’. This suggested 25 basis point increments, but they also suggested it depends on ‘the incoming data”.

Since Governing Council met the chances of further significant reductions in gas supply has increased as Russian energy exports to the euro area run dry. Hence inflation could rapidly rise.

This put the ECB between a rock and a hard place as inflation over the next year is likely to be dramatically higher. It could also tip the economy into a recession.

Looking at the economic data, much higher unemployment in the eurozone would significantly reduce the risks of second round effects on inflation. 

I should also mention Italian political risk could add to the complexity of the ECB’s position as Italy’s Prime Minister Mario Draghi could potentially resign on the day before the Governing Council’s announcement. This could harm the euro currency.

To be honest, the ECB probably like a weaker euro currency. This may be the best thing in the ECB being behind the curve in inflation and lagging the FED.

Germany has probably benefitted from the weaker euro, however, the manufacturing sector is starting to fragment over fear about energy and inflation.

The ECB ultimately need to act this week and implement a large rate hike, as energy price increases are likely to hit the economy sooner rather than later.