The ECB is expected to raise interest rates for the first time since 2007 but the quarter point rate hike will not be the big market mover. Instead, the recent price action of the Euro indicates that traders expect hawkish comments from ECB President Trichet.
With the annualized pace of Eurozone producer prices growing by the fastest pace on record, consumer spending in Germany doubling expectations and the German unemployment rate falling to a 14 year low, the ECB has to seriously reconsider their original plans to raise interest rates only once this year. The ECB is a central bank that hates surprises and because of that, they always like to prepare the markets weeks if not months in advance of any pending move. That is why they have been telling us that a 25bp rate hike is the appropriate expectation for the upcoming monetary policy meeting. They have also been warning that they are not planning a series of rate hikes. However the ECB may have to backtrack on these words given the recent economic reports. There are 3 possible scenarios for the upcoming interest rate decision that have been outlined in our ECB Preview. The ECB will most likely raise rates by 25bp and leave the door open for further rate hikes, but we wouldn’t rule out a 50bp rate hike or what the ECB has hinted all along, which is one rate hike and that’s it for the year.