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ECB's Main Refinancing Rate in focus

Simon Alagbe

Analyst

The European Central Bank is set to reveal if it can withstand the pressure of aggressive global monetary tightening waves as market participants await the conclusion of its policy meeting on Thursday. 

The policymakers at Europe's apex bank have outlined a plan to only hike the rate gradually despite the surging inflation in the zone seen at around four times the bank's target. The meeting will also have to consider the design of a new crisis tool to contain a potential fallout from the Italy debt crisis as political crisis creeps in to force out Mario Draghi, Italian Prime minister. The effect of the Ukraine-Russia war is also weighing heavily on the zone as the shutoff in Russian gas could kick off on Thursday and further worsen the growth situation of the zone with surveys of purchasing managers and consumers showing massive weakness with no respite in view.

I expect the bank to hike the rate by a quarter point and might mark the commencement of a cycle of hikes a move last witnessed in 2011 when the bank launched a series of stimulus measures to get back the economy to its feet. 

If the ECB comes out with a more hawkish decision than what has been projected we might witness a major recovery in the Euro which has shed gains against major currencies in the last few months even falling to parity against the US dollar. A dovish stance which also includes a decision to keep the rate constant at 0% might push the Euro back to parity against the Greenback and could be seen at lower levels not seen in almost 2 and a half decades. 

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