European Central Bank: The divergence between the central bank and the financial market is the same as that of the United States
2023-02-07
■ The ECB raised its main policy rate by 50 basis points each and announced a further 50 basis point hike at the March Governing Council meeting
■ Financial markets speculate on interest rate pause, but ECB President Christine Lagarde remains cautious on price rises
On February 2, the Governing Council of the European Central Bank (ECB) decided to raise the key policy rate by 50 basis points, bringing the central bank deposit rate to 2.50%. This is the fifth consecutive interest rate hike, and the rate hike rate is the same as the last time, but it is a decision in line with market expectations. However, financial markets responded with higher European stock markets, lower European interest rates, a weaker euro and fading expectations of monetary tightening through statements issued after the Governing Council meeting and ECB President Lagarde's press conference.
The following two points are the focus of financial markets. In other words, the March Governing Council (1) a 50bps rate hike and (2) a subsequent assessment of the direction of monetary policy. In fact, this was repeatedly emphasized in the statement and in the governor's press conference. As for (1) , the president had already announced half of the meeting in December last year, so no sense of surprise was digested. On the other hand, (2) was repeated for the first time in this statement and in the Governor's press conference, with financial markets circulating the interpretation that the ECB wants to get a pause on the rate hike option. Before and after the meeting of the Management Committee, the final target interest rate (terminal interest rate) for raising interest rates in the money market fell from around 3.5% to below 3.3%, probably because (2) was identified as a new factor.
However, financial markets appear to have been too ahead of their time. Presumably, the Bank of Canada announced on Jan. 26 that it became the first central bank among major developed countries to halt its rate hike cycle, overstretching expectations of an early end to rate hikes after the US Federal Open. Markets Committee (FOMC) and ECB Governing Council meeting. Overall, fading expectations of monetary tightening led to higher stock prices and lower interest rates, a comfortable direction for investors. As a result, financial markets have reason to speculate that rate hikes will stop soon.
European Central Bank President Christine Lagarde told a news conference that in the January Eurozone Consumer Price Index (HICP, preliminary data) released on February 1, excluding food, energy, alcoholic beverages and tobacco Core HICP is the persistently high global core price index. In addition, in response to a reporter's question, he denied signs of deflation and also made it clear that he was different from the US Federal Reserve (FRB). From these aspects alone, we see no basis for judging the ECB's stance of abandoning further interest rate hikes after this Governing Council meeting. European Central Bank President Christine Lagarde is still cautious about rising inflation in the euro zone, and the conflict between financial market expectations for an early end to interest rate hikes and the ECB's views may continue.