MNI SOURCES: ECB To Hold Rates At Peak Into 2024

The European Central Bank looks set to hike by 25 basis points in May, with at least one further 25-point increase expected over the summer, after which policymakers see rates holding steady at their peak into 2024, sources close to the Governing Council’s discussions told MNI.

With fallout from global banking turbulence in March and April seemingly limited for the eurozone, May’s debate will focus on the size of the hike needed to contain inflation, rather than on whether to hike or not. An upside surprise in flash April inflation data could still tilt the argument towards 50bp, but for the moment most Governing Council members feel that downgrading to 25bp hikes will better enable them to gauge whether they need to push the deposit rate to 3.5% or to 3.75%, though some might still argue for a maximum of 4% if prices remains hot. (See MNI INTERVIEW:Core Inflation Jump Needed For 50Bp-ECB's Simkus)

After reaching the peak, the ECB is likely to stay on hold for some time. One eurosystem official, who foresees a possibly lower top than would have been anticipated earlier in the year but persisting for longer, said a cut in benchmark rates would be unlikely “well into 2024,” although he wouldn’t be drawn on whether that meant the second quarter or into the second half. Another looked for rates at stay at their peak until at least this Christmas.

Overnight index swaps currently imply the deposit rate will top at around 3.7% by September, before edging down close to 3.6% by January.

25 POINTS SEEN IN MAY

For the May meeting, consensus is now gathering around a 25bp hike, as more Governing Council members acknowledge the risk of doing too much tightening, as opposed to too little, and as the potential for further financial instability adds to the case for caution.

Only an April core inflation print significantly in excess of the 5.7% recorded in March would be likely to give calls for 50bp any impetus, sources said. April’s flash inflation data is published on May 2, just two days ahead of the next Governing Council meeting. The ECB’s bank lending survey, also released on May 2, will be another key consideration.

“All dependent on no upside surprise from the inflation data, at least 25 is guaranteed,” one national central bank official said, referring to the May meeting.

“There will be some who argue for unchanged, a few more for 50. I think the real discussion is between 25 and 50 and the proposition will be 25,” the source added.

"PRUDENCE"

Another source concurred, noting that though the “usual voices” had called for 50bp, “this time it is not the majority position of the council, where prudence is increasingly mentioned.”

The other source thought it would be easier for the ECB to scale back the size of rate hikes to 25bps in May following the shift in guidance at the last meeting, and that this meeting could bring another change of tone, to signal smaller adjustments in policy ahead.

“In March credibility was at stake, but at this meeting our hands are freer,” the source said.

In March, the ECB raised the deposit rate by 50bps to 3.0% despite market turbulence as Swiss authorities engineered a rescue of beleaguered Credit Suisse.

An ECB spokesperson declined to comment.