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The European Central Bank's plans for more big rate hikes will face more resistance this week following the collapse of the Silicon Valley Bank (SVB). This is reported by people familiar with the discussions, the news agency Bloomberg.
ECB President Lagarde announced interest rate hikes: But the framework conditions have changed. / Picture: IMAGO/Panama Pictures© ECB President Lagarde announced interest rate increases: But the general conditions have changed. / Picture: IMAGO/Panama Pictures
Doves on the Governing Council are likely to argue that the economic environment has changed and more caution is needed, said those who asked not to be named.
This would contrast with the more supportive momentum for the hawks' position that had been building in the wake of surprisingly strong core inflation this month.
However, the majority of the Governing Council of the ECB is in favor of a rate hike
According to the people, the half-percent step in the council meeting this week is not up for debate, even if some traders are already betting on this possibility. There is no reason to assume that a majority of the Governing Council will be dissuaded from these plans, they say. Rather, the question will be whether it makes sense to announce future increases in advance.
An ECB spokesman declined to comment on the upcoming decisions and deliberations of the Governing Council to Bloomberg.
Investors' expectations of ECB policy have already shifted as global financial markets reacted to the SVB shutdown, with traders estimating the probability of a half a percentage point hike to be below 50%. They now see the deposit rate peaking at 3.30 percent, about 90 basis points lower than a week ago.
Further large rate hikes are becoming less likely
A half-point hike on Thursday has been hinted at so frequently since early February that the focus of debate has recently shifted to the prospect of a similar move in May. Just last week, President Christine Lagarde stressed that a 50 basis point move on March 16 was “very, very likely”.
Monetary authorities could want to signal in advance of the decision that such a large step may no longer be appropriate. In July 2022, the possibility of a 50 basis point rate hike surfaced just two days before the actual decision.
When asked at the press conference on February 2 what could prevent such a move this week, Lagarde said that it could only be the case in an exceptional situation.
"I can't think of a scenario where that wouldn't happen, unless it was quite extreme," she said.
Today, Monday, Bloomberg Economics said the turmoil in the banking sector reduces the likelihood that monetary officials will use this week's meeting to signal another big hike in borrowing costs for their next meeting
"So close to this month's meeting, uncertainty about SVB will reduce the appeal of pre-determining a 50 basis point hike in May," said Jamie Rush, chief Europe economist at Bloomberg Economics. "We now expect that the ECB will avoid sending a concrete signal."
