**As seen in Risk In The Week report 10/21/22, subscribe at cablefxm.co.uk/reports
The European Central Bank increased the main refinancing and deposit rates by a record 75 basis points in September. Analysts were mixed between a 50bp or a larger magnitude move coming into the event. The ECB had recently ended its era of NIRP and it is expected to keep extending the rise on the cost of capital as inflation rates remain too high, the last reading in eurozone prices showed a double-digit rise in the annual metric. On the projections front, the central bank lifted its inflation forecasts to 8.1% for 2022 and 5.5% for 2023, 2024 inflation was seen at 2.3%. Growth was downgraded to 0.9% for 2023, while it is expected to rebound to 1.9% by 2024. More on this, the central bank said that it sees the eurozone economy stagnating for the last quarter of 2022 and the first of next year. The ECB also announced the end of its two-tier system for bank reserves. The growth outlook is not benefited by the Ukraine war, food prices and the energy crisis. Inflation stands at record highs, with CPI and PPI not showing signs of easing. This has been reflected in the eurozone consumer confidence, the index is now at record lows as the October reading fell to -27.6, this indicator tends to lead EU growth. Analysts at Société Générale say that the balance sheet reduction is now more important to financial stability and avoiding market fragmentation, for this, the bank will need to communicate and consider its options carefully. SocGen sees the ECB rising rates by 75 basis points in October, it projects the terminal rate at 3.00% by mid-2023. Economists at Morgan Stanley upgraded their forecast for the ECB October meeting to a 75bps hike from a previous 50bp view, they expect this meeting to be followed by a half-percent rise in December and a quarter point move in February. Morgan Stanley sees the ECB peak rate at 2.50%.
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