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Euro Firms, ECB's Kazak's says ECB Likely to Hike 50bp in July and Sterilise Bond Purchases
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Euro Firms, ECB's Kazak's says ECB Likely to Hike 50bp in July and Sterilise Bond Purchases
Mar 22, 2024 2:18 AM

EUR firm as Sintra conference gets underway50bp hike in July possible says KazaksReuters says ECB considering 'sterilising' bond purchasesIn effort to minimise fragmentation risks

Above: File image of Martins Kazaks, copyright Latvia State Chancellery.

The European Central Bank looks set to kick-off its rate hiking cycle with a bold 50 basis point hike, according to a member of the Governing Council.

The Euro firmed against the Dollar and Pound after Martins Kazaks said it was worth looking at a 50bp hike in July, even if a 25 bp move was still the default.

He told Bloomberg TV that if the ECB hiked 25 bp in July then a 50 bp move in September would be needed.

"If we see that the situation has worsened, that inflation is high and we see negative news in terms of inflation expectations, then in my view front-loading the increase would be a reasonable choice," said Kazaks.

Viraj Patel, Macro Strategist at Vanda Research, says a 50 bp hike in July "will happen. The ECB has a small window to get hikes done... hawks realise it's a 'now or never moment'. Any EZ CPI beat this week will push the ECB to do 50bps in July".

The Euro to Dollar exchange rate is up a third of a percent already this week amidst improving global market sentiment and expectations the ECB will begin to close the interest rate gap that exists between it and the U.S. Federal Reserve with a number of interest rate hikes.

The pair is quoted at 1.0588 at the time of writing, the year's low is at 1.0349.

The Euro to Pound exchange rate is up by a similar margin this week at 0.8626. (Set your FX rate alert here).

In June Kazak's had said "the market should not be carried away with the speed of re-pricing and jumping to much higher interest-rate levels."

But hinting at a 50 bp move in July suggests he could be inclined to get the ECB's Deposit Rate back to 0% quickly.

This will be a busy week for ECB interest rate policy as central bankers descend on Sintra, Portugal for the ECB's annual central banking get-together.

Foreign exchange markets will be keen to hear of how the ECB deals with the question of keeping a lid on Italian and Greek bond yields as interest rates rise.

This forms part of the 'fragmentation' debate: some Eurozone countries have a better fiscal standing than others and would inevitably see the yield they pay on their debt (bonds) rise faster.

This could destabilise the Eurozone and is therefore a key risk to the Euro's outlook.

However the ECB said it has the tools to ensure the difference in bond yields between various countries remains stable, thereby containing risks.

Reuters quotes ECB sources as saying there is a plan in the offing that will see the ECB continue to purchase bonds of vulnerable countries, which would cap the yield these bonds pay and therefore place a cap on top of borrowing costs.

But to offset this stimulus the ECB would drain liquidity from elsewhere in the system, potentially offering banks attractive interest rates to park cash at the ECB according to Reuters.

This is known as a 'sterilisation' programme.

Antoine Bouvet, Developed Markets rates strategist at ING says the plan "would greatly help the credibility of this facility in our view, making it politically more palatable, and less liable to add to systemic risks".

Expect further discussion on this matter this week: a convincing plan could boost the Euro however any poor communications on the matter pose downside risks.

ECB President Christine Lagarde has already addressed the Sintra conference but offered no material guidance to markets, only confirming the need for a fragmentation tool.

She did however say she does not yet anticipate the Eurozone economy to fall into recession,

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