Today the European Central Bank (ECB) will announce its decision on interest rates. There have been calls for a rate hike to deal with growing inflation across EU countries, but the ECB appears to have resisted them for now. It is sticking to the narrative of ‘transitory inflation’. Markets will be watching closely and EU FX pairs could react to the sentiment from the meeting. Even though a hike isn’t expected, any hawkish tones will be closely inspected.
Incoming inflation data is expected to show the fastest rise since 2008. However, ECB president Christine Lagarde will provide reassurances on how underlying pressures remain too weak to roll back stimulus or go ahead with rate hikes. Today’s meeting will set the tone for a crucial one to be held in December where officials will decide the future of economic stimulus using economic projections. Big policy decisions are expected in the December meeting and the meeting today will set the stage.
Economies across the world are dealing with inflation partly due to the supply chain crisis and the rising cost of energy. Central banks are needing to balance the demands of supporting an economic rebound from the pandemic against rising inflationary pressures. The ECB has thus far poured billions of euros into financial markets with heavily-indebted members particularly reliant on the stimulus. Others are more cautious, with Austria’s finance minister urging the bank to raise interest rates. These disagreements between member states could spill over if inflation continues to increase in the coming months. For now, it seems as though the Central Bank will wait until December before deciding on any major announcements.
At the time of writing (12:15 pm) EU FX pairs were trading steadily in anticipation of the upcoming decision:
EUR/USD was trading around 1.16
EUR/GBP was trading at levels around 0.842 with GDP showing some strength