By Yoruk Bahceli
Aug 29 – Euro zone markets showed a two-thirds chance on Monday that the European Central Bank will raise interest rates by 75 basis points in September, after monetary authorities defended a major move to rein in four-year inflation. times above your target.
One particular focus of attention was Isabel Schnabel, a member of the council of the ECBwho argued that the risk is increasing that long-term inflation expectations become “de-anchored” from the bank’s 2% target, as polls suggest inflation is taking a toll on public confidence in central banks.
Other monetary authorities stated that it would be reasonable to advance the increases and that the neutral rate, estimated at around 1.5%, should be reached before the end of the year or in the first quarter of 2023.
On Monday, traders were pricing in up to 67 basis points of rate hikes at the September 8 policy meeting, meaning they fully consider a 50 basis point (bp) move and a 67% chance of one of 75 bp, according to Refinitiv data.
This compares with a 24% chance of a larger move estimated on Friday, before a Reuters report indicated that some policymakers wanted to discuss the larger move, raising the odds to 48%.
“The most important signal (from Jackson Hole) was the one from Schnabel, who spoke of the risk that inflation expectations exceed the target, that the central bank has to raise rates more violently, and that is something new” said Jan von Gerich, chief analyst at Nordea.
As bets for hikes mounted, the rate expectations-sensitive German 2-year bond yield advanced as much as 19 bps on the day to 1.162%, the highest since June 17.
The yield on 10-year notes, the euro zone benchmark, advanced 15 bps to 1.548%, its highest in two months.
“The ECB is clearly determined to bring the hikes forward and this will hold until the September meeting,” said Piet Christiansen, chief analyst at Danske Bank in Copenhagen, who now expects a 75bp hike.
The Chief Economist of ECBPhilip Lane echoed the comments, saying the bank should raise rates at a “steady pace” and that appropriate hikes will be larger the closer the bank gets to its maximum rates and the further risks stray from its target. of inflation.
