As a significant first phase, the transition from December 2024 to July 2024 marked the ECB’s normalization of its monetary policy. At the beginning of this phase, it was announced that net acquisitions under the epidemic prevention program would end in March 2024. Subsequently, net purchases under the asset purchase program (APP) were reduced and then ceased at the beginning of the third quarter. This phase was concluded with the raising of major policy levels out of the negative zone at the Meeting in July.
Despite concerns that rising energy costs would cause a recession in the eurozone, the European Central Bank has boosted interest rates by 75 basis points to combat record inflation
All 25 members of the governing council approved the move, which raises the bank’s benchmark deposit rate from 0% to 0.75%, the highest level since 2011.
On September 8th, the Governing Council voted to increase the three main ECB interest rates by 75 basis points. The current extraordinarily supportive level of policy rates is being replaced by levels that will guarantee inflation returns to the ECB’s 2% medium-term objective on time, and this is a significant step in that direction. The Governing Council believes that, based on current data, it will need to hike interest rates further throughout the next few meetings to curb demand and protect against the possibility of a sustained upward move in inflation expectations. In this article, we’ll review the ECB decision and its possible effect on markets.
ECB Decision
On Thursday, the European Central Bank (ECB) announced a rate hike of 75 basis points, bringing its benchmark deposit rate to 0.75%.
The European Central Bank stated that this “significant move frontloads the transition from the present very accommodating level of policy rates towards levels that would enable the rapid return of inflation to the ECB’s 2% medium-term objective.” Today there are several ways, which allow both investors and authorities to forecast a currency’s future price changes. An example of this is the Axiory’s strike indicators, which as this page shows, display mathematical calculations in order to find market trends and how a certain currency, for instance, Euro is going to perform. Strike indicators have shown that Euro is most likely to strengthen in the near future. The ECB said that it “expects to hike interest rates further” since inflation is still too high and would likely remain over the goal for a while.
To ensure that inflation returns to ECB 2% medium-term objective as quickly as possible, monetary policy is the central bank’s top priority. In this subsequent phase, interest rates will be determined on a meeting-by-meeting (MBM) basis. Having determined that rate forward guidance was mostly an acceptable response to the lower limit restriction, the shift to the MBM method is consistent with ECB monetary policy agenda. The MBM technique is more suited to calibrating monetary policy in a highly uncertain environment as policy rates rise from zero to lower limits.
Eurostat’s preliminary estimate puts August’s inflation at 9.1 percent. Inflation has remained high due to factors such as rising energy and food costs, demand pressures in some industries due to the reopening of the economy, and supply constraints. Inflation may continue to climb in the foreseeable future as price pressures deepen and spread throughout the economy. Inflation will decline when the effects of the normalization of monetary policy on the economy and price-setting become fully felt.
Christine Lagarde, president of the European Central Bank, warned investors not to assume that such large-scale changes were “the norm,” but she did promise “several” rate hikes in the coming months to bring inflation down from its latest “far too high” record of 9.1 percent and back towards the bank’s target of 2 percent.
The Effect Of The Decision
Shortly after the European Central Bank declared a 75 basis point interest rate increase, European markets finished higher on Thursday.
At the close of trading, the broader Stoxx 600 index in Europe was up 0.5%, with gains concentrated in the banking and financial services sectors (up 2.3% and 1.2%, respectively). In terms of industry, retail stocks were the worst performers, down 1.5% at market close. Following Wall Street’s strong overnight rebound bounce, which was the greatest day for all three indexes since August 10th, Asia-Pacific markets remained divided.
The Danish National Bank followed suit, increasing its benchmark rate by 75 basis points to 0.65% in keeping with its objective to maintain the value of the Danish crown against the euro. The action reversed the country’s almost decade-long practice of negative policy rates.
Surprisingly, economic indicators in the Eurozone have held up thus far. A surprisingly robust 0.8% growth rate in the second quarter and a record low unemployment rate of 6.6% in July bolstered demands from hawkish ECB officials for more “forceful” action on rates.
According to technical indicators, the primary currency pair might be consolidating between the levels of 1.0050 and 0.9899. But it’s important to remember that the quotes seemed to come around quickly two days ago, from the lowest levels in 20 years, surpassing the short-term trend line in the process.
Interest rate hikes from ECB can have a dramatic effect on the Forex market, which is the biggest financial market in the world. When ECB decides to increase interest rates, foreign exchange dealers seek to purchase the currency, driving up the exchange rate. But when interest rates are lowered, investors are more likely to sell the currency, causing its value to fall. Investors may avoid the negative effects of unexpected shifts in currency exchange rates by doing in-depth and timely research prior to the movement of interest rates.
Even if interest rates may be forecasted with the help of the correct economic models, unexpected pronouncements from a major central bank can send the foreign exchange markets into a tailspin. Forex traders are aware that even after doing extensive analysis or crunching numbers, central banks may still surprise the market with a rate reduction or raise. Traders may earn greatly from market volatility when currency rates shift. So, this means for the Forex market, that because of the interest hikes, it’s most probable that the demand for Euro will increase. As a result of this, Euro might become stronger against other major currencies. However, it should be stated that Core inflation is forecast to stay high until about the middle of 2024 when reopening benefits will have faded and supply constraints and energy input cost pressures will have eased. Indicators imply that most measures of longer-term inflation expectations presently remain at approximately two percent, lending credence to the anticipated drop in inflation; nonetheless, recent above-target adjustments to several indicators urge further monitoring.
As stated at the beginning of this article, the inflation rate in the Eurozone reached 9.1% in August, and it is anticipated to rise to 10% or higher in the following months as energy costs continue to rise. At the same time, people are feeling the pain and cutting down on spending, while businesses are struggling due to rising energy costs, raising the possibility of a recession in the area. So, what will be in the future? According to analysts, ECB decisions might have a positive effect on the financial markets and countries’ economic growth. However, positive changes cannot happen in the short run.
