Suddenly a half-point ECB hike isn’t guaranteed after bank collapses in U.S. and share price slides in Europe


Market expectations for a half-point rate hike by the European Central Bank are changing on the eve of the decision.

Now, the implied rate hike for Thursday’s meeting is 35 basis points — basically meaning it’s a 50-50 decision as to whether the ECB will lift rates by a half point, which the central bank had all but promised heading into it.

Credit Suisse shares
on Wednesday plunged to record low amid worries for the health of that banking giant, dragging eurozone banking peers
lower. The banking giant’s stock rallied on Thursday after saying it will borrow from the Swiss National Bank and offering to buy back its fallen bonds.

The yield on the 2-year German bund
rose 19 basis points to 2.59% on Thursday, having fallen as low as 2.36% on Wednesday. Prices move in the opposite direction to prices.

Investors are hoping the ECB won’t be as stubborn as it has been in the past. “In the past, the ECB has shown itself to be dogmatic in the face of changing news. This caused problems in mid-2008 when it raised rates as the banking situation was deteriorating in the U.S.,” said David Dowsett, global head of investments at GAM Investments.

The financial turmoil is overshadowing recent economic data.

While the headline rate of inflation has cooled a bit, to 8.5% from as high as 10.6% year-over-year, the core rate of inflation has actually accelerated, to 5.6%. Wages, which are difficult to track in Europe, appear to be rising. On the flip side, wholesale natural gas prices have dropped sharply, and even wage deals seem to show a temporary rather than sustained increase in pay.

“As a result, the ECB may leave the size of the May move and the subsequent policy path open this week, emphasising a return to a data-dependent ‘meeting-by-meeting’ approach,” said Holger Schmieding of Berenberg Bank.