At 20:15 tonight, the European Central Bank will announce the interest rate resolution, and then at 20:45, ECB President Lagarde will hold a press conference. Asian stock markets had fallen before the meeting.
1. This is the first time that the European Central Bank has raised interest rates in 11 years, so it is of great significance (tonight's meeting is the most important meeting in the past few years);
Market participants are betting on ECB President Lagarde's announcement to raise interest rates. The focus of attention is whether the ECB will initially try to raise interest rates by 25 basis points or start the new normal of raising interest rates by 50 basis points. Given soaring price pressures and the end of its asset-buying programme, the ECB has no choice but to raise interest rates.
2. The market did not unanimously expect the result of raising interest rates, which is terrible. As the world's second largest central bank's first interest rate hike in more than ten years, it did not guide the market to form a consensus expectation, which will inevitably lead to drastic fluctuations in the market.
Last month, the European Central Bank predicted a 25 basis point rate increase, but now the market expects a 50 basis point rate increase (the probability is 50%). If an unexpected 50 basis point increase is equivalent to directly ending the "eight-year negative interest rate" policy, it may lead to a sharp rise in the euro and further move away from parity against the US dollar.
The last time the ECB raised interest rates was in 2011. Its deposit rate has been negative since 2014 and is currently negative 0.5%.
3. Behind this interest rate hike, Europe faces two major challenges:
1) The European Central Bank's task has been complicated by the political crisis in Italy
Italian Prime Minister Delacquis seems poised to step down after three key political parties announced they would not support him in a confidence vote.
On Wednesday, Italian Prime Minister Mario Draghi asked the upper house, the Senate, to hold a confidence vote to effectively decide whether his coalition government will continue to govern. Whether it wins the Senate's confidence motion or not, it puts the government on the cusp of collapse. Italy could plunge into months of turmoil and weigh on the euro, Italy and eurozone bonds at a time of soaring inflation and raging wars on the eurozone's doorstep.
EU Economic Commissioner Gentiloni pointed out that Italy may face the risk of a "perfect storm", and the next few months may be very difficult for Italy.
2) The prospect of gas shortages could lead to a recession in Europe. If Russian gas supplies to Europe return to more normal levels after the Nord Stream 1 pipeline maintenance period ends, the euro will be boosted.
Draghi resigns or not? And how will the European Central Bank start raising interest rates for the first time in more than a decade? And can Nord Stream No.1 natural gas pipeline be restarted? Even if one can't be completed, it may bring great hidden dangers to the market outlook of the euro.
4. Before the European Central Bank announced the interest rate hike tonight, the global market had already experienced disorderly fluctuations, "I don't know why I rose, I don't know why I fell". Last night, the rise of US stocks and US dollars was an example, when the United States released worse-than-expected economic data (the sales of existing homes plummeted in June).
5. The interest rate hike by the European Central Bank may not be a node event. Despite Europe's own factors, the Fed's policy path and interest rate hike speed are still unresolved. However, we need to focus on whether the US dollar "weakens", because the Federal Reserve is likely to slow down the rate increase after raising interest rates by 75 basis points next week.
Therefore, it is too early to judge that the danger has been lifted. Tonight's ECB decision could be a trigger and markets could overreact.
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