At 20:15 on July 21, Beijing time, the European Central Bank will announce the interest rate decision of the European Central Bank. Then at 20:45, ECB President Christine Lagarde held a monetary policy press conference. The European Central Bank is set to raise interest rates for the first time since 2011 this week, but as the economic outlook darkens, the market's focus has moved quickly to a rate hike path beyond Thursday.

 

With inflation still accelerating and growth slowing sharply, the economic outlook for the euro zone has become increasingly uncertain. "The ECB faces tougher trade-offs than any other major central bank," said Silvia Ardagna, head of European economic research at Barclays.

 

 

Five key questions the market wants to know

 

1. Will Europe raise rates modestly this week?

 

The European Central Bank is all but certain to raise interest rates this week, and has signaled a 25 basis point hike to curb inflation, which has hit a record 8.6 percent. The last time the ECB raised interest rates was in 2011. Its deposit rate has been negative since 2014 and is currently at minus 0.5%.

 

A 50bps rate hike by the ECB is not ruled out, especially given the weak euro, but some analysts said that was unlikely based on growth concerns.

 

Martin Wolburg, senior economic analyst at Generali Investments, said: "Above FX7搭建25 basis points would be seen by the market as a very hawkish sign under current conditions."

    

The chart below shows the ECB monetary policy, where the black line is the policy rate (%), the red line is the euro area inflation rate (%), and the blue line is the ECB balance sheet (trillion euros)

 

 

2. What is the ECB's plan to contain stress in the bond market?

 

The ECB is expected to announce a new anti-fragmentation tool in response to a surge in bond yields that has hit the most indebted countries hardest. ECB policymakers are weighing whether to announce the size and duration of an upcoming bond-buying program, sources said recently.

 

Announcing a massive programme could boost confidence in the ECB's commitment to combating so-called fragmentation risks, but if it is too small, investors could be disappointed. Meanwhile, a new political crisis in Italy is putting more upward pressure on Italian borrowing costs.

 

Yield spread between Italian 10-year bonds and comparable German bonds

 

 

"The more robust the tools they design, the less risk they have to be tested by the market," said Reinhard Cluse, chief European economist at UBS.

    

3. What does a weakening growth outlook for the Eurozone mean for rate hikes?

 

Investors will wonder if the ECB is still likely to raise rates more aggressively in September (suggested last month), especially as the growth outlook has deterioratFX7搭建ed in recent weeks amid heightened concerns over European gas supplies in the case of.

 

Money markets have begun to reduce expectations for the scale of the ECB's monetary tightening, with analysts saying the window of opportunity for the ECB to raise interest rates could close sooner than expected.

 

Generali's Wolburg said a weakening economic outlook for the euro zone would affect the ECB's tightening path, with his base forecast for a deposit rate of 1.25 percent by the end of 2023.

    

4. Does the ECB expect a recession?

 

The ECB will release its next set of economic forecasts in September, but no doubt ECB President Christine Lagarde will be asked about her outlook.

 

Thursday's meeting coincides with the end of annual maintenance on Russia's largest pipeline of natural gas to Germany. Concerns about Russia dying in Europe have fueled recession fears. The European Commission now expects the euro zone economy to grow by 1.4% next year, down from a previous forecast of 2.3%.

 

"They (the ECB) will concede that a recession is a reasonable risk scenario, but that's not their base case right now," said Andrew Mulliner, head of global integrated strategy at Janus Henderson.

    

As the chart below shows, Eurozone economic doubts are growing

 

 

5. Is the ECB worried about a weak euro?

 

The euro fell to parity against the dollar for the first time in 20 years, creating problems for theFX7搭建 ECB. Letting the euro weaken would fuel inflation that is already well above its 2 percent target. A more hawkish ECB support for the euro, or faster rate hikes, could hit growth, but moves to boost the euro are generally seen as unlikely.

 

 

 

"They know it's very dangerous to get caught in a cycle of trying to support the currency through central bank action, because you need to tighten too much and it hurts the economy and the currency," said Janus Henderson's Mulliner.

 

 

Institutional Outlook This week's ECB resolution and euro trend

 

1. Societe Generale looks forward to the European Central Bank's interest rate decision: it is expected to raise interest rates by 25 basis points, and will launch tools to deal with fragmentation risks

 

① Analysts at Societe Generale said that the European Central Bank is about to announce the first interest rate hike in 11 years (25 basis points this week), which will activate the mechanism to deal with financial fragmentation and support countries with economic difficulties.

 

 While downside risks to growth have increased, for now, the ECB's guidance of a possible 50bps rate hike in September is likely to remain in place, in part because inflation forecasts need to be revised up again in September, at least in the short term ;

 

② The European Central Bank will not publish new economic forecasts, but if it updates its assessment, it may point to a high degree of uFX7搭建ncertainty about the economic outlook, especially in terms of energy supply. Inflation risks remain skewed to the upside, while growth risks remain skewed to the downside

 

2. Nordea Bank: ECB will follow its guidance of raising rates by 25 basis points

 

① Nordea Bank chief analyst Jan von Gerich said that despite high inflation in the euro zone, rising price pressures, and significantly weakened economic growth momentum, the European Central Bank has no room to remain dovish at its meeting on Thursday, and it is expected that it will start to increase its momentum. interest rate cycle, the rate of interest rate hike is 25 basis points;

 

②Although some hawks hope that the ECB will open the door for a larger rate hike, and recent media reports have also indicated that the ECB will discuss a larger rate hike this week, the bank analysts believe that the ECB will still follow Its earlier guidance was to raise rates by only 25 basis points on Thursday

 

3. Deutsche Bank: If the European Central Bank raises interest rates by 50 basis points, it may herald the end of forward guidance

 

① Deutsche Bank economist Mark Wall said that if the European Central Bank raised interest rates by 50 basis points on Thursday, deviating from its previous guidance, it may indicate that officials are willing to finally abandon the practice of communicating plans in advance;

 

②The economist said that if ECB policymakers finally decide to raise inteFX7搭建rest rates by 50 basis points, then "no one will criticize" them. He believes that the consistent experience this year is that in such an environment of rapidly rising inflation, the central bank's forward guidance can quickly become outdated. If the ECB deviates from guidance and raises rates by 50 basis points on Thursday, it will prove that it is indeed in data-dependent mode

 

4. Brown Brothers Harriman: 50bps ECB rate hike may only boost euro briefly

 

① Brown Brothers Harriman Bank economists pointed out that despite reports that the European Central Bank may raise interest rates by 50 basis points tomorrow, the euro has lost its upward momentum around 1.0275. For the euro, the best outcome is a 50bps rate hike and an announcement of aggressive anti-financial differentiation tools, while the worst outcome is just a 25bps hike and further delays in the use of the tool;

 

②The bank's economists believe that raising interest rates by 50 basis points may temporarily boost the euro, but the fact that the ECB may not be able to hand over a credible anti-financial differentiation tool should eventually weigh on the euro.