Markets
As expected, the European Central Bank raised interest rates by 25 basis points to 2.25% today. He said the war in the Middle East is generating inflationary pressures, which explains why rates should be raised “across a range of scenarios.” The central bank remained vague about future moves. It remains well positioned to navigate uncertainty and will take a data-driven, meeting-by-meeting approach. However, updated forecasts indicate at least one more surge is in the pipeline. Headline inflation rose to 3%-2.3%-2% in 2026-28 from 2.6%-2%-2.1% in March. Rising energy prices are expected to inflate prices of food, goods and services to some extent, causing core inflation expectations (2.5%-2.5%-2.2%) to rise significantly as well, to well above 2% across the policy horizon. GDP forecasts were revised slightly lower for this year (0.8%) and next year (1.2%), reflecting the more pronounced impact of the war on commodity markets, real income and confidence. 2028 raised to 1.5%. Inflation risks are skewed to the upside (energy prices, spillovers on wages and other prices, fragmented supply chains, constraints on raw materials…), and growth risks are skewed to the downside (protracted conflict, higher energy prices for a longer period, trade frictions, supply chain disruptions…). The full repercussions of the conflict ultimately depend on the severity and duration of the energy shock, as well as the magnitude of its indirect and second-round effects.
ECB President Lagarde said in the question-and-answer session that the decision was taken unanimously with no alternative proposals (e.g. a larger increase or the status quo) being discussed. You deflected a question about what to expect for next month or later this year. But it went so far as to ignore the idea that raising interest rates today should never be viewed as an insurance move. Instead, the ECB sees the breadth of the initial energy shock and thus reacts to it. Lagarde added that they had placed a “more moderate” scenario alongside the negative and riskier scenario relative to the base scenario. She said that was unlikely to happen, but even then, today’s rate hike was deemed appropriate. The ECB President did not say which scenario applies today but referred to her March speech in which she outlined the central bank’s reactionary function in three possible situations. Of these three, I rejected the phrase “seeing through trauma.” The second case – significantly overshooting inflation, although not so persistently as to require deliberate policy adjustment – appears to be the case instead. She didn’t seem too worried about growing up. “It’s not as if we’re in an environment where growth is lacking or under significant threat.” Thus, the door remains wide open for more “thoughtful amendment.” Financial markets are raising their bets for cascading action in July with the rally currently discounted at +/- 65%. But the broader market reaction was muddled by Donald J. Trump. In a message before hitting social media, he said the United States would hit Iran hard tonight. He threatened to “take full control” of Iran’s oil and gas markets by seizing Kharg Island, Iran’s oil export artery, “at some point.” Oil prices jumped from intraday lows around $92 to $94, underlying bond yields erased earlier losses and the euro fell against the US dollar. Meanwhile, it has all reversed, suggesting that markets do not believe Trump’s threat. This could backfire.
News and opinions
In the Q2 regional network survey conducted by Norwegian Bank (NB), telecom revised its growth forecast for the current quarter from 0.4% to 0.2%, but saw growth pick up in Q3 (to 0.3%). All sectors (except oil services) expect increased activity going forward, even as customer hesitation increases. Investment in defense and emergency preparedness is boosting activity in commercial services. Activity in the construction sector remains weak. A slightly smaller number of contacts reported capacity constraints, and the proportion of people experiencing employment difficulties decreased somewhat. 30% of participants reported full capacity utilization. This indicator gradually fell to its lowest level since 2020. Recruitment difficulties for the likes of IT experts also decreased. There are still difficulties in recruiting many other skilled workers. However, estimated wage growth for this year and next was revised upward from 4.2% and 3.9%, respectively, in the first-quarter survey to 4.5% and 4.1%. The two-year NOK swap yield decreased by 5 basis points. Markets see less than a 20% chance of a 25 basis point hike in interest rates next week. September at 90% discount. The krone fell slightly to EUR 10.99/NOK.
