After today’s economic news showed core inflation in the Eurozone eased for the first time in 10 months, the markets are expecting the European Central Bank (ECB) to slow its aggressive rate-hike campaign when it meets on Thursday. The markets have fully priced in a 25 bp rate hike, and the chance for a 50 bp hike has fallen to 20% from more than 30% last week.
Today’s Eurozone Apr core CPI eased to +5.6% y/y from +5.7% y/y, the first time in 10 months that core prices have eased. Also, today’s ECB's quarterly Bank Lending Survey said credit standards "tightened further substantially" in Q1, and the decline in net loan demand from firms was more than foreseen by banks in the previous three months and the largest decline since the global financial crisis. The tighter credit standards are dovish for ECB policy.
The slowing of core price pressures in the Eurozone is a welcome development for the ECB. Executive Board member Schnabel said the ECB doesn’t only need to see a turning point on core price pressures but a sustained decline “that gives us confidence out measures are starting to work.” However, it remains to be seen if inflationary pressures have peaked after today’s inflation report also showed that Eurozone Apr CPI rose +7.0% y/y, stronger than expectations of +6.9% y/y.
ECB policymakers remained concerned about the impact of profit margins outpacing wages which could lead to a wage-price spiral. ECB President Lagarde warned of a “tit-for-tat” dynamic where widening corporate margins propel salaries and prices ever higher. Danske Bank said, “There are clear risks for the inflation decline to be slower than previously anticipated due to rising corporate margins.” ECB Vice President de Guindos also warned that “any sort of conflict between wages, profits, and the public sector could be extremely detrimental to the future, and it could produce a reaction of the ECB in terms of our monetary policy.”
The recent banking turmoil that has led to the collapse of three U.S. banks and prompted a government-brokered takeover of Credit Suisse clearly helped tighten European credit conditions, as seen in today’s quarterly Bank Lending Survey. Market expectations are for the ECB, after Thursday’s 25 bp rate hike, to deliver two more 25 bp rate hikes at the June and July policy meetings to take the deposit rate to a peak of 3.75% from 3.00% today.
On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
