Markets
Credit Suisse’s pre-market announcement that it plans to take up CHF 50bn offered in liquidity by the Swiss National Bank (fully collateralized) under a Covered Loan Facility as well a short-term liquidity facility helped restore confidence in the run-up to ECB policy decision. The liquidity stopgap nevertheless remains a temporary measure with structural action (merger, split-up, (government) equity injection,…) still likely.
The ECB pushed through with its flagged 50 bps rate hike despite recent financial stability concerns. They lifted the deposit rate from 2.5% to 3% as inflation is projected to remain too high for too long. Headline inflation forecasts faced a downward revision mainly owing to a smaller contribution from energy prices. ECB staff now see inflation averaging 5.3% in 2023 (from 6.3%), 2.9% in 2024 (from 3.4%) and 2.1% in 2025 (from 2.3%). At the same time, the ECB revised up its core inflation forecast for this year: avg 4.6% in 2023 (from 4.2%) before decelerating to 2.5% in 2024 (from 2.8%) and 2.2% in 2025 (from 2.4%). Inflation is thus still expected to remain above the 2% inflation target over the policy horizon. The central banks adds that forecasts data back to before the recent tensions on financial markets, implying bigger uncertainty around them. From now on, Lagarde and co shift to data-dependence when it comes to future policy decisions. Not only in order to asses the inflation outlook, dynamics of underlying inflation and the strength of monetary policy transmission, but also to monitor current market tensions closely and stand ready to respond as necessary to preserve financial stability in the euro area as well as price stability. Regarding the former, the statement suggests providing liquidity support if needed. In a reference to earlier days “monitor closely” ranked junior to “monitor very closely” and “strong vigilance” when it comes to the ECB’s readiness for action. It suggests that financial tensions aren’t top of the central bank’s problem list as for now. The ECB adds that the euro banking sector is resilient, with strong capital and liquidity positions. New baseline projections for growth showed an upgrade for this year (1% from 0.5%) and a weaker-than-expected pick-up in 2024 (1.6% from 1.9%) and 2025 (1.6% from 1.8%). Risks are tilted to the downside.
At the press conference ECB Lagarde said that the central bank has a lot more ground to cover if the inflation baseline persists and uncertainty would remove around financial tensions. It isn’t waning on its commitment to fight inflation. Lagarde said that the 50 bps rate hike was the only option on the table, taken at a record time, with only 3-4 members wanting more time to monitor the situation. Overall, the ECB’s tone remained hawkish on inflation. There’s no trade-off between price stability and financial stability with the ECB ready to address each in its own matter. The first via interest rates, the second via liquidity tools. We conclude from today’s hawkish tone that current market turmoil won’t derail the ECB from additional rate hikes at upcoming meetings. Financial markets remain extremely stoic during and after the Q&A session: on FI, FX and stock markets!! News & Views
Riksbank’s deputy governor Floden said the central bank must keep the focus on inflation after yesterday’s “very bad” data showed price pressures unexpectedly accelerating in February. Both the (core) readings for January and last month (far) exceeded the Riksbank’s forecasts. Floden hoped to see signs of a turnaround materializing but instead the opposite happened. On the recent repricing of tightening by others (ECB, Fed), Floden said it helped the Riksbank a little. It coped with a relative disadvantage as markets considered the Swedish central bank to have less leeway than its peers to raise rates further, denting a.o. the SEK’s investor appeal. EUR/SEK is unchanged at 11.20.
A council member of Poland’s national bank said there are no conditions for lowering rates given the central bank’s inflation projection. Kotecki said he was concerned that price pressures aren’t yet showing signs of weakening. February inflation yesterday accelerated to 18.4% and core measures published today showed a speeding up to 12%, bringing prospects of rate cuts to a more distant future. Kotecki has been a member of the hawkish minority at the NBP for some time now. His comments also go against governor Glapinski’s view/hopes of rate cuts in Q4 this year. The zloty traded volatile today, swinging from losses to gains to eventually trade flat at EUR/PLN 4.70 currently.
