MY expectation for the March 16 governing council meeting in the European Central Bank (ECB) is clear: interest rates will be raised by 50 basis points, and it will be no surprise either. If one listens to the statements of various members of council, as well as the guidance that ECB President Christine Lagarde has given, then an interest rate increase should be expected. The interesting question is what the ECB chooses to do in the following months.
In my view, the most likely outcome of the press conference on March 16 is that it will leave financial markets in a kind of indecisive no man's land, probably with an indication that the arrow is still pointing up for the interest rate direction at the ECB but no more than that either.
I am often critical in my assessment of the ECB but this time it is not my intention to give the impression of a hesitant central bank. There will be two good reasons why the ECB is very balanced in its statements. The first is that there is quite a long time until the next monetary policy meeting in May. Therefore, it is natural to use the time to observe whether the previous interest rate increases have had any effect on the economy.
The second reason is one I consider political. The majority of the ECB's governing council are still so-called doves, which means that they prefer an interest rate level on the low side and a monetary policy that is not too tight. An excellent example is from March 8 when the head of the Italian central bank, Ignazio Visco, issued a warning, and he also has a vote when the ECB rate is set.
Visco sent a direct warning to the "hawks" in the governing council who argue for tight monetary policy. It is in line with Italian members of parliament who, since the fourth quarter of last year, have been dissatisfied with the ECB's interest rate increases.
Many economists and participants in the financial market in general, will probably find it irresponsible if the ECB does not raise interest rates further. But the worst thing that could happen to the ECB's credibility is if the majority in the governing council decides not to let themselves be dominated by the hawks and thus decide not to raise interest rates.
I think the risk of such a "palace revolution" is very low right now, but the fact is that the decision-makers in the governing council express themselves so divergently. This shows that there is a growing disagreement internally. Therefore, it is probably fine to have a sort of break for political reasons, and I estimate that this is also a reason why the statements on March 16 will be very balanced.
There has been very strong marking at the top ECB level for a long time, and it is in full public view, which is remarkable. There is no doubt that the hawks have felt held down for a long time, particularly in Germany and the Netherlands. Since the middle of last year, the two leading countries have regained monetary freedom by once again talking about interest rate increases.
The Dutch central bank chief, Klaas Knot, was very specific in an interview in the Financial Times in December last year when the ECB, as a Christmas gift to investors, previously raised interest rates on the 21st. In the interview, Knot said the ECB had just moved into the second half of the interest rate cycle, and that he could see it peaking this summer.
Any prediction can be adjusted over time according to developments but it looks like a doubling of the interest rate as it was on December 21 — that it is very close to 5 percent for lending at the ECB, and thus 4.50 percent for deposits. I can safely say that it is above the current market expectations and will probably disturb the European stock market if the development goes that far. But what I give even more focus on is whether the yield curve will continue to invert. Will it become even steeper with the high end of the curve in the one- to two-year maturity?
It expresses that investors believe inflation will, at some point, fall sharply and an inverse yield curve usually expresses a market expectation of a coming recession. It will probably come but regardless, I would put my money on Knot's "double down" on interest rates as the most likely scenario for the next three to four months.
Peter Lundgreen is the founding CEO of Lundgreen's Capital. He is a professional investment advisor with over 30 years of experience and a power entrepreneur in investment and finance. Lundgreen is an international columnist and speaker on topics about the global financial markets.