Christine Lagarde, President of the European Central Bank, ECB attended a press conference following the meeting of the governing council of the ECB in Frankfurt/Main, Germany, on 15 June 2023. AFP.
Overnight, the ECB raised its deposit rate for the eight meeting in a row by 25bps to 3.50%. The chart below shows the interest rate is now at its highest levels since 2001.
Source: Bank of Singapore, Bloomberg.
The decision was widely expected. But President Lagarde was hawkish, warning: “do we still have ground to cover? Yes. And I can even go further than that: I can tell you that barring a material change to our baseline, it is very likely the case that we will continue to increase rates in July.” The ECB also raised its 2023 inflation forecast to 5.1%, still far above its 2% target. We thus add another 25bps rate hike to our forecasts – anticipating a 25bps increase in September in addition to 25bps in July – and expect the deposit rate to now peak at an all-time high of 4.00%.
Source: Bank of Singapore, Bloomberg.
The hawkish ECB keeps the outlook challenging. Data revisions now show the Eurozone suffered recession after the energy shock from the war in Ukraine with GDP shrinking in 4Q22 and 1Q23. Further rate hikes will keep growth weak this year.
Source: Bank of Singapore, Bloomberg.
In contrast, the BoJ today kept its deposit rate at -0.10% and 10Y yield cap “around 0%” to continue entrenching inflation near its 2% target. The BoJ believes Japan’s surge in inflation shown in the second chart may not last without monetary policy staying loose. We expect the BoJ will lift or end its 10Y yield cap in 2023 as inflation firms. However, officials will keep the deposit rate negative to spur growth further. We thus see the dovish BoJ benefiting Japan’s risk assets further. Today the Nikkei hit a fresh 33-year high after the BoJ meeting as the last chart shows.
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