It’s been confirmed that the European Central Bank (ECB) is prepared to hike by 75 basis points and is likely to do so for another 2 or 3 meetings before slowing down or re-thinking at all.
This will temporarily support the Euro on the basis that the yield differential to the US dollar will be stable. With even the hope of some eventual slight catch-up should the US Federal Reserve stop hiking at some point as the ECB continues?
This may be a bit of a stretch, however, as Europe now faces, on top of war and extreme inflation, the prospect of truly aggressive interest rate hikes as well.
Unlike previous high inflationary periods, the impost of higher rates is most likely unnecessary, and perhaps even pointless in this highly dislocated world. That said, the existing highly stimulatory level of rates does need to be unwound to some extent.
What the ECB is committed to doing is hiking aggressively in yet another single-minded central bank battle with inflation. This action will further encourage other banks around the world, like the RBA, to continue to raise rates aggressively too.
This is what the ECB is doing, but not necessarily what it should do.
Given the tremendous challenges ahead on the energy front, the war front, and with broad-based inflation already impacting people’s lives, it might be wiser to maintain rates at slightly stimulatory levels to help offset the general economic pain rather than adding to it.
Of course, one of the factors tipping the ECB’s hand into an aggressive approach is the massive government handouts now set to occur in relation to higher energy prices. Europeans are now living in an environment of great uncertainty with the ECB taking away what government handouts might have provided.
My forecast remains a ‘Dark Recession’ for Europe.
For the Euro, some momentary relief, but the overall trend remains toward much lower levels.\Market insights and analysis from Clifford Bennett, Chief Economist at ACY Securitie
