Fundamental Analysis

ECB Unlikely to Throw Caution to Wind on Rate Hikes Despite Record Inflation

04-Jul-2022 10:48:15

The euro slipped against the dollar Friday as investors bet that the European Central Bank is unlikely to throw caution to the wind on rate hikes despite data showing inflation swelled to a record.

EURUSD fell 0.48% to $1.0432.

Euro area inflation rose by a record 8.6% in June, above expectations for an 8.4% rise.

But the upside surprise isn’t likely to alter the ECB’s rate hike course “as the majority on the monetary policy council seems to prefer a cautious start,” Commerzbank said in a note ahead of the data.

The European Central Bank is preparing to deliver its first rate hike in 11 years later this month, with investors betting on a 25 basis points rather than 50 basis points rate hike.

The ECB has been battling above-trend inflation, driven by a surge in energy prices, that has many concerned that a recession is more likely than not.

But ECB president Christine Lagarde downplayed these fears earlier this week at the Sintra Forum.

While acknowledging that the central bank has “markedly revised down” its forecasts for growth in the next two years, Lagarde said the ECB is “still expecting positive growth rates due to the domestic buffers against the loss of growth momentum.”

Yet many believe the central bank will have to pivot to steeper pace of hikes later this year should the eurozone experience another energy-infused upside surprise in inflation.

“If the supply of Russian natural gas to the euro area is squeezed significantly further by the time of that [September] meeting, the inflation outlook will be much darker too, perhaps prompting an even bigger rate hike then and additional aggressive tightening beyond,” Daiwa Capital Markets said in a note.

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