At the End of the European Tunnel, "Two 'Big Steps' Expected in Two Months"

[Asia Economy Reporter Yujin Cho] The manufacturing and service sectors in the Eurozone (20 countries using the euro) have reached their highest levels in seven months, leading to expectations that the European Central Bank (ECB) will not narrow the pace of its interest rate hikes. With recession concerns temporarily eased, there is also speculation that the ECB may raise its benchmark interest rate by more than 1 percentage point in February or March to curb high inflation.

According to major foreign media on the 24th (local time), both the manufacturing and service Purchasing Managers' Indexes (PMI) for the Eurozone in January, as reported by S&P Global, stood at 50.2. This surpasses the previous month’s figure (49.3) as well as market expectations (49.8), marking the highest level in seven months since June last year (52.0). After a period of readings below 50, which had raised recession fears, a reversal has now occurred.

Chris Williamson, Chief Economist at S&P Global Market Intelligence, assessed that "there is further evidence that the Eurozone economy is emerging from recession." He added that falling energy prices are driving down Eurozone consumer prices, supply chain disruptions are stabilizing, and China’s reopening is acting as a positive factor, all of which are restoring confidence in the Eurozone economy.

[Image source=Reuters Yonhap News]

Economic experts agree that this data will put significant pressure on the ECB to continue raising interest rates over the coming months. With confidence that the Eurozone economy has escaped recession fears, monetary tightening aimed at curbing persistently high inflation is expected to continue for the time being.

Andrew, Chief European Economist at Capital Economics, predicted, "Given that inflationary pressures remain high, an additional interest rate hike of more than 1 percentage point over the next two months is inevitable." He expects the ECB to implement a big step (a 0.5 percentage point increase in the benchmark rate) at the next monetary policy meeting on February 2, followed by another big step at the March meeting, resulting in a total 1 percentage point increase over two months.

Even if the January Eurozone consumer price index, released a day before the February meeting, falls short of market expectations again, the prevailing view is that the rate hike magnitude will be maintained at the February meeting.

On the same day, ECB President Christine Lagarde stated, "We believe that the benchmark interest rate must continue to be raised at a fairly steady pace until we are confident that we have reached the necessary path." At the ECB’s last monetary policy meeting last year, a big step was taken to raise the Eurozone’s benchmark interest rate from 2.00% to 2.50%.

Christine Lagarde, President of the ECB.
Photo by Reuters Yonhap News

At that time, due to expectations of economic recovery driven by energy prices, the pace of rate hikes was narrowed from 0.75 percentage points to 0.5 percentage points, but the ECB made clear its intention to continue tightening. Following the last meeting, President Lagarde indicated at a press conference that "inflation remains high," suggesting that an additional 0.5 percentage point rate hike will continue this year. Regarding the economic outlook, she said, "The outlook for this year is not bright, but it will be much better than feared," indicating that the worst of the economic downturn has passed.

Meanwhile, the U.S. Federal Reserve (Fed) is widely expected to raise its benchmark interest rate by only 0.25 percentage points at the first Federal Open Market Committee (FOMC) meeting of the year, scheduled for January 31 and February 1. Efek Ozcardeska, Chief Analyst at Swissquote Bank, said, "The ECB, which showed the most dovish stance among central banks worldwide last year, has become the most hawkish central bank this year."

This content was produced with the assistance of AI translation services.