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Market Extra: ECB could hike 50 basis points in September, says central bank’s Holzmann in first comments after meeting: report

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The European Central Bank could raise interest rates by 50 basis points in September, said the first member of the governing council to speak after Thursday’s meeting that rattled financial markets.

Hawkish ECB policy maker Robert Holzmann said Friday that he was expecting a September hike of 25 basis-points, but it could be as big as 50 basis points, according to media reports. He was speaking at a press conference at the Austrian central bank, where he is current governor.

Holzmann said the region’s high inflation ran a risk of becoming entrenched if the central bank does act appropriately, Reuters reported. He also reportedly said he thought markets reacted well to Thursday’s meeting.

The ECB announced that its bond-buying program would cease in July, and that it would increase interest rates by 25 basis points, adding that a September interest rate increase was expected. European stocks tumbled Thursday and continued to lose ground on Friday, with the Stoxx Europe 600 index
SXXP,
-1.48%

down 1.4%

Bond yields across Europe soared on Thursday as the ECB looked ready to line up with other central banks around the world in tightening policy to get a grip on high inflation.

The yield on the 10-year German bund
TMBMKDE-10Y,
1.407%

was down 2 basis points to 1.41% after soaring to levels not seen since 2014 on Thursday. The yield on Italy’s 10-year bond
TMBMKIT-10Y,
3.622%

continued to climb, up another 4 basis points to 3.644% after reaching highs not seen since 2018. The spread between the two has surged as investors have demanded more to hold Italian paper.

Read: ECB failure to address ‘fragmentation’ threat raises risk of steep bond-market selloff: economists

Goldman Sachs economists said they now expect the ECB will hike interest rates by 50 basis points in both September and October.

“[Thursday’s] communication—for a larger hike if the inflation outlook does not improve—points to a low bar for a 50bp rise in September. Moreover, our inflation projections (which are significantly above the ECB’s in coming months), rising wage pressure and the likelihood of further increases in long-term inflation expectations suggest that another 50bp increment in October is likely,” said a team led by chief European economist Sven Jari Stehn.

He said a 25 basis point hike is likely for December given they see inflation slowing in the fourth quarter of this year, with the deposit rate approaching the lower end of the 1% to 2% range for the neutral policy cited by ECB officials. Goldman expects three more 25 basis point hikes in 2023.

“The main risk to the ECB’s accelerated hiking cycle is the re-emergence of debt sustainability concerns, especially in Italy. While President Lagarde [Thursday] remained vague about the features of a potential backstop and confirmed that the ECB does not have a ‘strike price’ for backstopping periphery yields, we would expect the ECB to pause the hiking cycle and activate a backstop in the event of a sovereign stress scenario,” said Stehn.

Europe was grappling with high inflation and supply chain issues from the pandemic when Russia invaded Ukraine in late February, triggering a surge in commodity prices and even more pressure on prices and the region’s economies.

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