The borrowed euro is ordered to rise in price or grow green – Newspaper Kommersant No. 20 (7465) of 02/03/2023
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The European Central Bank (ECB) at its February meeting raised rates by 0.5 percentage points (p.p.) – on loans to 3%, on deposits – up to 2.5%, on margin loans – up to 3.25%. The regulator also announced its readiness for the next increase in March – again by 0.5 percentage points, fixing the intention to tighten its own policy in any situation in the economy. Such a hawkish approach should bring down inflation and prevent a change in long-term expectations, however, rising rates have already affected the increase in borrowing costs – average lending rates for corporations and individuals have doubled over the year. The regulator agrees to neutralize the growth in the cost of borrowing for issuers of green bonds – the ECB plans to reinvest funds from the sale of assets, taking into account the requirements for decarbonization.
European Central Bank on Thursday continued raise rates – on loans from 1.25% to 2%, on deposits – from 0.75% to 1.5%, on margin loans – from 1.5% to 2.25%. Recall that for the first time since 2011, they were raised in July to combat rising prices – then the base rate increased from zero to 0.5%, in September and November – by another 0.75 percentage points, and in December – by 0 .5 p.p.
Made on Thursday statement it says the board of governors will stick to a “significant” increase in rates and keep them at levels that allow for a pronouncedly restrictive policy to return euroinflation to the 2% target.
The regulator has already confirmed a plan to raise the rate by 50 basis points in March – and it may not be the last: the head of the ECB, Christine Lagarde, also announced further tightening of monetary policy “under any scenarios of the development of the situation.”
Starting from March, the ECB will also start selling assets purchased under the quantitative easing program for €15 billion monthly until June 2023, after which the sales dynamics may be revised. Moreover, the ECB has promised to reinvest funds from redeemed corporate bonds into bonds of climate-responsible issuers, which should contribute to the “decarbonization” of the ECB’s corporate bond pool.
The regulator justifies the rigidity of the policy with the intention to prevent a steady shift in inflation expectations.
In the meantime, price growth in the euro area is already slowing down – according to preliminary estimates by Eurostat, in January to 8.5% from 9.2% in December (the peak was passed in October – then inflation was 10.7%), month by month the indicator decreased by 0.4 percentage points (energy prices decreased by 0.9 percentage points, while food prices rose by 1.4 percentage points). In annual terms, the increase in the cost of energy slowed down from 25.5% to 17.2%, food also began to slow down – from 14.1% to 13.8%. Core inflation decreased by 0.8 percentage points month on month and did not change in annual terms (5.2%).
The slowdown in business activity could be a limiting factor for raising rates – according to the ECB, the composite index of the cost of new loans for corporations has already reached 3.41% (at the beginning of last year – 1.5%), for households – 2.94% (1 .3%). So far, however, business activity is accelerating amid falling energy prices – PMI according to S&P Global in January rose from 49.3 in December to 50.2 points. In the fourth quarter, GDP growth in the euro area also turned out to be positive: the indicator rose by 0.1% qoq, seasonally adjusted (in the third quarter, the increase was 0.3%), yoy growth was 1.9% (generally for EU quarterly growth was zero, annual – 1.8%). In general, for the year, the euro area economy grew by 3.5%, the EU – by 3.6%. In Germany, however, GDP contracted by 0.2% in the last quarter.
Anton Prokudin, chief macroeconomist at Ingosstrakh Investments Management Company, notes that many market participants expect the rate to peak no higher than 3.5%, so one-year German bonds are quoted at 2.6%, and ten-year bonds at 2.1%. Yields on short and long bonds are close to the peak, in contrast to the United States (there, long yields have fallen sharply to 3.4% after a peak of 4.4%) – the European debt market is also in a state of optimism and is waiting for an early rate cut, the expert adds , warning that this is unlikely, and the market may expect higher yields and disappointment in long-term bonds.
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