This week’s interest-rate decision by the European Central Bank is going down to the wire as officials await two key economic reports arriving just one day before they convene.
(Bloomberg) — This week’s interest-rate decision by the European Central Bank is going down to the wire as officials await two key economic reports arriving just one day before they convene.
Tuesday morning will first see the release of the ECB’s quarterly survey of bank lending — offering a first glimpse into how the recent financial-sector turmoil has impacted credit growth.
An hour later, Eurostat will publish April’s inflation reading, with analysts estimating an uptick in the headline measure but a slowdown for the underlying gauge that policymakers currently pay more attention to.
There’s a broad agreement within the ECB’s 26-member Governing Council that the deposit rate, currently 3%, must rise further to combat consumer-price gains that still far exceed the 2% target.
But unlike at previous meetings, when many officials voiced their preferences for adjusting borrowing costs beforehand, the importance of the remaining data points — not to mention Wednesday’s Federal Reserve decision — leaves the choice between a 25 or 50 basis-point hike up in the air.
What Bloomberg Economics Says…
“The euro area was resilient through winter, but not so resilient as to raise alarm among members of the Governing Council. With inflation and bank-lending data landing before the ECB meeting, there’s still a narrow path to a 50 basis-point hike.”
—Jamie Rush, chief European economist. Click here for full preview
Investors reckon the lesser move — which would be the smallest since the rate cycle began last July — is likelier, assigning only a 12% chance to the alternative. Executive Board member Isabel Schnabel said in comments published on April 24, though, that a half-point step is “not off the table.”
For Gilles Moec, chief economist at Axa Group, a quarter-point is the base case. But a big shock in Tuesday’s data could yet tilt the Governing Council toward doing more.
“If we get an upside surprise in inflation plus a benign bank lending survey, then they might go for 50,” he said. “It’s very rare that we have a cocktail of data that gives us a clean picture.”
Indeed, numbers released Friday pointed to an uneven trajectory for the 20-nation euro zone. While it avoided an energy-induced winter recession as France and Italy returned to growth and Spain gathered momentum, Germany only narrowly dodged a downturn with first-quarter stagnation.
Similarly on the inflation front, France and Spain saw price gains quicken, while Germany recorded an unexpected slowdown.
Settling on the right policy calibration is currently the ECB’s “biggest challenge,” Croatian central-bank chief Boris Vujcic has said. His Cypriot colleague, Constantinos Herodotou, warned risks “may act in opposite ways as regards inflation dynamics.”
However tricky, officials are eager to get some kind of handle on what’s happened to bank lending in the quarter that saw Silicon Valley Bank collapse and Credit Suisse Group AG get taken over by UBS Group AG.
While banks were already curbing credit in late 2022, any additional tightening in conditions resulting from the financial ructions could compound the impact of the ECB’s rate hikes and convince it to raise borrowing costs by less.
The impact “certainly needs to be taken into account when assessing the transmission of the measures that we have already taken,” Schnabel said last month.
On the other hand, there are reasons for continuing alarm over underlying price growth that could yet demand tougher action. While headline inflation has abated in tandem with a slump in energy costs, company profit margins have been widening and wages are rising.
For Veronika Roharova, head of euro-area economics at Credit Suisse, the combination of still-high core price pressures and receding banking risks allows the ECB to keep tightening — but probably at a slower pace.
“I don’t have an exact threshold that would push us to 50 basis points, but I think a flat or higher core CPI print would be a strong indication that they may have to go for it,” Roharova said.
“On the other hand, more worrisome signs in the Bank Lending Survey and actual lending data indicating that stress is feeding through and accelerating the tightening would likely rule out a 50 basis-point hike,” she said.
–With assistance from James Hirai.
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