Stock market today: Wall Street rises, and S&P 500 hits highest level in more than a year

However, they noted the ECB was lagging other central banks in reducing its balance sheet and that reinvestments under its pandemic emergency purchase program would continue. The widely expected 50 basis point rate rise is the central bank’s fourth increase this year. The European Central Bank opted for a smaller rate hike at its Thursday meeting, taking https://forexarticles.net/tokenexus-review-what-you-need-to-know/ its key rate from 1.5% to 2%, but said it would need to raise rates “significantly” further to tame inflation. Euro area banks’ exposure to the recent banking sector stress which arose in other regions has been limited. More broadly, as financing conditions tighten, we will gain more insight into the resilience of euro area firms, households and banks.

It now sees headline inflation averaging 5.3% this year, followed by 2.9% in 2024. In December, the bank had projected a 6.3% inflation figure for 2023 and a 3.4% rate in 2024. The gathering of central bank governors in Jackson Hole, Wyoming, last month was characterised by commitments to tackle inflationary pressures despite forecasts of recession. She added that interest rates were not yet “sufficiently restrictive” to get inflation down to the ECB’s 2% target and made reference to future “policy decisions”, suggesting that more than one additional rate rise could be on the cards. Core inflation, stripped of volatile food and energy components, slipped only to 5.3% in May from a high of 5.7% in March, and was expected to slightly moderate to average 4.9% next quarter and 3.9% in the final three months of the year.

ECB to raise key interest rates further

Market commentary ahead of Thursday’s meeting was dominated by so-called “taper talk” – speculation as to whether the ECB would raise the prospect to tailing off the programme. Federal Reserve policymakers are about to take their first break from an interest-rate hiking campaign that started 15 months ago, even as they confront a resilient US economy and persistent inflation. The next two days’ worth of trading could turn out to be particularly interesting due to the sharp drop in CPI expected on (US time) Tuesday as well as the market being (over?) confident that the Fed is going to pause its rate hiking cycle on Wednesday. “It is pretty much obvious that on the basis of the data that we have at the moment, significant rise at a steady pace means we should have to raise interest rates at a 50 basis point pace for a period of time,” she said.

• Inflation excluding energy and food continued to increase in February and ECB staff expect it to average 4.6% in 2023, which is higher than foreseen in the December projections.
• Ending an eight-year experiment with negative interest rates, the ECB also lifted its main refinancing rate to 0.50%, and promised another hike, possibly as soon as its Sept. 8 meeting, with more to follow later.
• Accordingly, the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will be increased to 3.75%, 4.00% and 3.25% respectively, with effect from 10 May 2023.
• On the third criterion, the strength of monetary policy transmission, the Governing Council noted at the last meeting that past rate hikes had a clear impact on financing conditions, while the impact on the real economy would still be uncertain.

Beyond the near term, growth is projected to recover as the current headwinds fade. Overall, the Eurosystem staff projections now see the economy growing by 3.4% in 2022, 0.5% in 2023, 1.9% in 2024 and 1.8% in 2025. Having borrowed at zero or even negative rates at a time when the ECB’s main worry was persistently low inflation, banks can now simply park TLTRO cash with the ECB and enjoy a risk-free return that rises with each deposit rate hike. The central bank for the 19 countries that use the euro raised its deposit rate by a further 75 basis points to 1.5% – the highest rate since 2009. The slowdown in the pace of monetary policy tightening comes only days after euro zone banking data showed the biggest drop in demand for loans in over a decade. These tools influence both the amount and cost of loans that people and companies can get.

Monetary policy decisions

Letting the currency fall exacerbates inflation, already well above its 2% target. A more hawkish stance to shore up the currency, or more rapid rate hikes, could hit growth. The baseline projections for growth in 2023 have been revised up to an average of 1.0% as a result of both the decline in energy prices and the economy’s greater resilience to the challenging international environment. ECB staff then expect growth to pick up further, to 1.6%, in both 2024 and 2025, underpinned by a robust labour market, improving confidence and a recovery in real incomes. At the same time, the pick-up in growth in 2024 and 2025 is weaker than projected in December, owing to the tightening of monetary policy. The European Central Bank is expected to raise interest rates by 25 basis points at its meeting next week but is unlikely to give specific guidance on future rate decisions, Silvia Ardagna, European economist at Barclays, writes in a note.

The governing council concluded that an “ample degree of economic accommodation” was still necessary to support the recovery. “In our view, even a slight reduction of the pace of purchases could be interpreted by the market as tapering and jeopardise the result of the recent more dovish communication on easing financing conditions,” the pair wrote. It hiked by 75 basis points in October and September and by 50 basis points in July, bringing rates out of negative territory for the first time since 2014. I am delighted that several members of this Parliament were able to join the celebrations in Frankfurt a few days ago, reflecting the close and fruitful dialogue our institutions have always maintained.

European Central Bank chief signals more rate hikes ahead with inflation still ‘strong’

“We know that we have a lot more ground to cover, but it is a big caveat, if our base line were to persist,” she said, highlighting that “the pace we will take will be entirely data dependent.” In a move which may be fought by commercial banks, it curbed the subsidy it provides to such lenders through 2.1 trillion euros worth of ultra-cheap three-year loans called Targeted Longer-Term Refinancing Operations, or TLTROs. In reaction, German Finance Minister Christian Lindner welcomed the ECB’s determination to fight inflation while Italy’s new economy minister Giancarlo Giorgetti said the ECB needed to take the slowdown into account. While this neutral rate is an undefined concept, most policymakers appear to put it at roughly 1.5-2%, suggesting the ECB is now at the bottom end of the estimated range. Recent increases have been larger for indebted countries like Italy, Spain and Portugal but sources told Reuters the ECB was not seeing the need to activate the new scheme in any country at present.

After a combined 375 basis points of hikes over the past year, economic activity in the 20-member bloc has slowed, with Europe’s biggest economic engine – Germany – and the euro zone as a whole falling into a winter recession. Before the global financial crisis, we mainly conducted monetary policy by setting key interest rates. The rate on the deposit facility and the rate on the marginal lending facility define a floor and a ceiling for the overnight interest rate at which banks lend to each other.

More from Reuters

Euro zone inflation was last reported at 6.1%, still over three times the ECB’s 2% target but down from a peak of 10.6% in October last year. It is expected to remain above target at least until 2025, according to the poll, averaging 5.5% and 2.5% this year and next, respectively. The central bank is forecast to raise its deposit rate again by a quarter percentage point on June 15 to 3.50%, according to all 59 economists polled in the latest Reuters survey.

Overall, the incoming information broadly supports the assessment of the medium-term inflation outlook that the Governing Council formed at its previous meeting. Headline inflation has declined over recent months, but underlying price pressures remain strong. At the same time, the past rate increases are being transmitted forcefully to euro area financing and monetary conditions, while the lags and strength of transmission to the real economy remain uncertain. The Governing Council stands ready to adjust all of its instruments within its mandate to ensure that inflation returns to its 2% target over the medium term.

Share prices rally at Lagarde’s nomination as ECB president

And to support financial stability, it is essential that you, as co-legislators, make tangible progress towards completing the banking union and that you strengthen regulatory policies to further enhance the resilience of the euro area financial sector. We do not see a trade-off between financial stability and price stability in the euro area. Over time, the pursuit of price stability through monetary policy, and of financial stability primarily through macroprudential policy, are complementary.

In particular, as the Governing Council continues normalising monetary policy, the TPI will ensure that the monetary policy stance is transmitted smoothly across all euro area countries. The singleness of the Governing Council’s monetary policy is a precondition for the ECB to be able to deliver on its price stability mandate. Today, in line with the Governing Council’s strong commitment to its price stability mandate, the Governing Council took further key steps to make sure inflation returns to its 2% target over the medium term. The Governing Council decided to raise the three key ECB interest rates by 50 basis points and approved the Transmission Protection Instrument (TPI).

Let me start by providing a brief overview of the economic outlook before going on to discuss our latest monetary policy decisions. The euro dropped a touch on the ECB’s rate announcement, while bond yields dropped sharply and bank shares rose, reinforcing views that markets had been pricing in a more hawkish decision. But the euro zone is more exposed to the war in Ukraine and a threatened cut off in gas supplies from Russia could tip the bloc into recession, leaving policymakers with a dilemma of balancing growth and inflation considerations. The euro climbed to as high as $1.0278 after the rate hike before easing back to $1.0183, flat on the day. Markets are now pricing in a 50 basis point rate hike in September and see a combined 127 basis points of rises over the rest of the year.

Lagarde said policymakers would discuss the “key principles” of how shrink the 3.3 trillion euro Asset Purchase Programme at their December policy meeting. Investors now see rates peaking at around 2.6% next year, below expectations for close to 3%, seen recently. Activating the instrument will be entirely at the discretion of the ECB and the bank will target public sector bonds with maturities between one and 10 years. The new bond purchase scheme, called the Transmission Protection Instrument (TPI), is intended to stop any excessive rise in borrowing costs for governments across the currency bloc as policy tightens.

At the Governing Council’s upcoming meetings, further normalisation of interest rates will be appropriate. The frontloading today of the exit from negative interest rates allows the Governing Council to make a transition to a meeting-by-meeting approach to interest rate decisions. The Governing Council’s future policy rate path will continue to be data-dependent and will help to deliver on its 2% inflation target over the medium term. In the context of its policy normalisation, the Governing Council will evaluate options for remunerating excess liquidity holdings. The TPI will be an addition to the Governing Council’s toolkit and can be activated to counter unwarranted, disorderly market dynamics that pose a serious threat to the transmission of monetary policy across the euro area. The scale of TPI purchases depends on the severity of the risks facing policy transmission.