The ECB is catching up with the Fed

The European Central Bank (ECB) following the results of the October meeting again raised key rates by 0.75 percentage points. The rate on loans was increased to 2%, on deposits – up to 1.5%, on margin loans – up to 2.25%. Further pace of tightening of the ECB’s monetary policy will depend on data on inflation in the euro area – while it is at its peak. In the US, however, weaker demand has already lowered expectations for a top rate from the Federal Reserve, which began its tightening cycle ahead of the ECB.

The European Central Bank continued to raise rates on Thursday. The rate on loans was increased from 1.25% to 2%, on deposits – from 0.75% to 1.5%, on margin loans – from 1.5% to 2.25%. The first ECB rate hike since 2011 in July – then the base rate increased from zero to 0.5%, in September followed by an increase of another 0.75 percentage points (p.p.). The regulator expects further rate hikes, says in a statement ECB.

The tightening of the regulator’s policy is still associated with the acceleration of inflation – in September, the growth in prices in the euro area amounted to 9.9% (including energy prices rose by 40.7%, food – by 11.8%). The pace of subsequent rate increases will depend on inflation, as well as on the state of the eurozone economies, said the head of the ECB, Christine Lagarde. She also pointed to “probably a significant decline in economic activity in the third quarter,” including a contraction in demand in the services sector, which supported the recovery of the European economy after the pandemic. The weakening of GDP growth will continue until the end of this year and early next, the head of the ECB expects.

At the same time, the regulator urges governments to introduce only limited and temporary measures to compensate consumers for rising energy prices in order to avoid excessive fiscal easing and pressure on prices.

Meanwhile, the growth rate of the US economy in the third quarter turned out to be higher than expected – on an annualized basis (if the economy grew at such a rate all year), the increase was 2.6% after a decline of 1.6% in the first and 0.6% in the second quarter. The main contribution to GDP growth was provided by foreign trade (2.8 percentage points), consumer demand (1 percentage point) and government spending (0.4 percentage points). Investments worked in the red (-0.9 p.p.). The deepening recession in housing construction (-1.4 p.p.) blocked the positive from other investments (0.5 p.p.), the contribution from stocks was also negative (-0.7 p.p.), notes Dmitry Polevoi from LokoInvest. However, in subsequent quarters, growth in the US is likely to slow down, which slightly reduces market expectations for the Fed’s peak rate, the expert points out. Now the Fed rate is in the range of 3-3.25%.

For the ECB, the current rate hike cycle is a record fast, previously raising rates by 2 percentage points took at least 18 months, now the regulator is proceeding from the fact that high inflation, even if it is caused by supply-side factors, is too harmful for the economy.

In December, the ECB is likely to act less aggressively, while in February the tightening cycle may end altogether, ING Bank expects.

“The ECB needed to prevent a widening gap between rates in Europe and the US, which could further lead to an outflow of investors from the euro to the dollar, which, in turn, would have an even greater impact on rising prices and rising inflation,” the analyst says. “BCS World of Investments” Denis Buivolov. The amplitude of further rate hikes will depend on the nearest inflation data, the expert notes.

Tatyana Edovina