2023-05-02 14:51:34
Christine Lagarde, President of the ECB. (Photo credits: ECB)
Comments by Franck Dixmier, Global CIO Fixed Income at AllianzGI, ahead of the ECB meeting on May 4, 2023.
- We expect a 25 bp rate hike at the European Central Bank meeting on May 4.
- With core inflation still too high, the ECB must continue its restrictive monetary policy.
- This rise, widely anticipated, should not cause tensions on the markets.
As pointed out in mid-April by Philip Lane, chief economist of the ECB, the calibration of the rate hike at the meeting of May 4, 2023 must take into account the future evolution of inflation and its core component, but also the proper transmission of monetary policy.
In this respect, the national inflation statistics published on April 28, 2023 and the total and core inflation figures published on May 2 remain incompatible with the ECB’s price stability objective. In fact, headline inflation at the end of April was up slightly, at 7% in the euro zone, compared to +6.9% in March (after peaking at 10.6% in October 2022), and core inflation still remains high, at 5.6% against 5.7% in March. The outlook does not call for a short-term slowdown either, given the still strong wage growth in the euro zone (like the agreements recently negotiated in Germany in the public sector).
Furthermore, although the Bank Lending Survey published on 2 May reveals an accentuation of the slowdown in the distribution of credit, the stress on the banking sector in the euro zone has eased considerably, and should not play an essential role in taking decision of the ECB, which should focus more on the outlook for inflation.
If there is a clear consensus in the market in favor of an ECB rate hike on May 4, in line with recent statements by Council members, there is sure to be a debate when they meet on the rise amplitude.
We believe that the ECB should raise its rates by 25 bps, and indicate its intention to continue in this direction. While the induced tightening of monetary policy by the mandatory redemption of the TLTROs in June (for an amount of 480 billion euros) should encourage the ECB to take a gradual approach of small steps, its determination should remain intact.
Investors are anticipating a rate hike, and the ECB’s decision on May 4 should not cause tensions on the markets.
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