Today’s ECB March meeting minutes gave a glimpse into the central bank’s analysis of the financial turbulence in the wake of the Silicon Valley Bank collapse. Delivering on the pre-announced 50 bps hike was important to instill confidence and avoid creating further uncertainty in financial markets, MPC members agreed. The ECB acknowledged the risk of a potential banking crisis. But given that the next policy meeting wasn’t scheduled before May, the governing council would have time to asses the effect of any potential tightening in financing conditions on inflation dynamics in between. In general though, it was agreed that while keeping a close eye on financial stability was important, price stability (i.e. bringing inflation back to target) should be reiterated as being the primary objective and more tightening would follow if the March projections materialize. Members also said that the message should be conveyed that if the market turmoil hadn’t occurred, the council would have put forward more (unconditional) rate hikes. With the benefit of hindsight, it looks that the ECB was right not to get carried away by the banking turmoil. As the dust settled, several governors in the meantime stressed the need for further tightening with most of them explicitly keeping the option of either a 25 of 50 bps rate hike firmly on the table. Dutch governor Klaas Knot was the latest today to do so. He said that the ECB may need to raise interest rates in June and July following a May rate hike. In a (in our view too) conservative scenario of a 25 bps May hike, that would bring the deposit rate to 3.75%. “It’s too early to talk about a pause”, he said. That’s an option only when underlying inflation has shown a convincing reversal. Talking about the size, he said April inflation data is going to be key. This is scheduled for release two days before the May 4 policy meeting, together with other crucial input coming from the Bank Lending Survey. ECB president Lagarde in a speech today added to the debate, saying that “there’s still a little way to go on the path”, citing too high inflation compared to the 2% target.
In other news, US data today undershot expectations. US weekly jobless claims came in at 245k, slightly more than the 240k expected. The Philly Fed business outlook however missed a -19.3 consensus considerably. The indicator fell from -23.2 to -31.3, mainly driven by a drop in prices paid (from 23.5 to 8.2). The other components and the six month ahead gauge improved, though remained in contraction territory. Core bond yields nevertheless extended an earlier decline after the release. US yields ease between 4.2-7.4 bps with the front outperforming. German yields in a similar curve shift decline 3.2-5.6 bps. The dollar is trading with a minor disadvantage against most peers, including the euro. EUR/USD ekes out a tiny gain but remains sub 1.10. The trade-weighted index eases marginally to 101.82. Sterling is going nowhere. EUR/GBP keeps steady above 0.88 with a triangle slowly but steadily closing as it awaits the next UK data (retail sales tomorrow). Stocks in Europe and the US loses about half a percent or more.
News & Views
Belgian consumer confidence rose from -9 to -6 in April, the highest level since February 2022 and slightly above its long-term average. Consumers expressed slightly more optimism about expected macroeconomic developments in Belgium (-15 from -16) and, to a greater extent, have revised downwards their fears of a rise in unemployment over the next twelve months (14 from 19). On a personal level, households are more confident about their future financial situation (6 from 4) and have increased their saving intentions (-6 from -9). April Belgian business confidence will be released next week Monday April 24.
The Belgian National Accounts Institute (NAI) released data of government deficit and public debt in the context of the excessive deficit procedure. For 2022, the general government budget balance was -3.9% of GDP, compared with -5.5% in 2021. The improvement in the budget balance was attributable to the strong economic recovery in the wake of the pandemic. Pandemic-related expenditure meanwhile dropped sharply after 2020 (€19.4bn in 2020 vs €2.7bn in 2022). Part of this support has nevertheless been replaced by measures to counter rising energy prices (€5.9bn). Public debt (as per the Maastricht definition) amounted to 105.1% of GDP at the end of 2022. This represents a contraction of 4.0 percentage points of GDP compared to 2021. The favorable development of the debt ratio in 2022 was entirely attributable to strong nominal GDP growth.