Earlier today, the ECB recently increased its deposit rate by 75 basis points, from 0% to 0.75 basis points, marking the first time European rates have been positive in almost ten years (since July 2012), adding that “the Governing Council’s decision-making on policy rate will continue to be data-dependent and adopt a meeting-by-meeting approach.”
During the US session, the German DAX traded 1.5% lower, falling to 12,800 EUR and completely erasing yesterday’s relief rally.
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The ECB itself described today’s move as a “major step” that’s frontloading the transition toward a more neutral policy stance and said that following the raising of the deposit facility rate to above zero, “the two-tier system for the remuneration of excess reserves is no longer necessary” and “the Governing Council therefore decided today to suspend the two-tier system by setting the multiplier to zero.”
A couple of pointers from the following press conference>
- Downside scenario for growth includes negative growth in 2023,
- Downside scenario sees gas rationing,
- Downside scenario is really dark,
- Inflation is spreading across a whole range of products, including in services,
- Next rate hike will not necessarily be 75 bps; that’s not the norm.
More hikes incoming
Shortly after the press conference, news appeared that the European Central Bank officials are prepared to raise interest rates by another 75 bps at the meeting in October if the inflation outlook justifies taking yet another significant step up, according to people familiar with the debate, Bloomberg reports.
“We continue to expect it to raise its deposit rate to 1.75% by the beginning of next year, but to pause the rate hike process after that because of the recession that will then be visible. However, to bring inflation back to 2%, we believe it would have to raise its deposit rate to around 4%.” economists at Commerzbank reported after the decision.
Moreover, the ECB is anticipated to raise rates by 50 basis points in October and by 25 basis points each of the three sessions from December to March, reaching a terminal rate of 2.00% at that meeting, according to analysts at TD Securities.
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The key support for DAX still remains at 12,400 EUR, but it looks like it could be broken down as rallies are tepid and sold-off quickly.