From Breakingviews - Banking turmoil could help euro doves cry victory
Investors are evenly split between those expecting a 25 basis point hike and those backing a 50 basis point raise on Thursday, according to probabilities derived from market prices by Refinitiv. The chances of the deposit rate topping out at 3.5% are only one in three. Before the weekend, the consensus was that it would peak at 4%.
ECB hardliners argue that it should stick to a 50 basis point rise. They note that interest rates are the right tool to fight inflation. Financial stability is better monitored, in their book, via solvency rules, stress tests and backstops. Yet taking a softer stance on rates might help the ECB assess its work so far. After being slow to react to a spike in inflation, Lagarde has brought the cost of money from below zero to 2.5% in just seven months.
Much of the impact will be felt next year, because rising rates typically take 12 to 18 months to translate into higher borrowing costs for households and companies. By then, the ECBheadline inflation to average 3.4%. Analysts are more optimistic, predicting a fall to 2.4% in 2024. As for GDP, the central bank in December forecasted a rebound in growth from 0.5% this year to 1.9% in 2024.
Given the delayed effect of its aggressive tightening, a more relaxed ECB has a realistic shot at hitting its growth forecasts by engineering an economic “soft landing”. That would also help protect the bloc’s banks from transatlantic contagion.
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