Week Ahead (20 March)
Monday, 20 March – ECON committee to host monetary dialogue with Christine Lagarde
The Economic and Monetary Policy Committee of the European Parliament will hold the next of its regular monetary dialogues with the President of the European Central Bank, Christine Lagarde, today. Lagarde will be questioned by the Committee’s MEPs about ECB’s decision last Thursday to raise interest rate hikes by 50 basis points, taking its key deposit rate from 2.5% to 3%.
Although last week’s 50-basis points hike was widely expected, it took place in the face of growing uncertainty in the banking sector, only hours after the bailout of Credit Suisse by the Swiss state. At the press conference following the Governing Council's meeting, Lagarde played down fears about eurozone’s banking sector, insisting that it ‘’is currently in a much stronger position than it was back in 2008. Eurozone inflation is expected to be 8.5% in February, down from 8.6% in January and 9.2% in December, following a recent drop in energy prices. However, core inflation hit record levels, rising to 5.6% from 5.3% in January. Meanwhile, ECB updated its projections on inflation, forecasting an average of 5.3% in 2023, 2.9% in 2024, and 2.1% in 2025.
Although the ECB GC has so far been unanimous on its rate hikes, a debate emerged last week with certain of its members pushing to immediately stop raising rates. Nevertheless, the majority stuck with the initial plan of a 50-basis point hike. However, its members also refrained from expressing any commitment to keep raising rates ‘’at a steady pace’’, despite acknowledging that inflation remained ‘’too high’’. This indicates a potential shift towards a more dovish approach. The upcoming meetings of the GC in May and June will test the ECB’s appetite to keep increasing interest rates to tame inflation amid growing fears of a potential financial crisis.
Tuesday, 21 March - Trilogue negotiations on the European Digital Identity framework to kick-off
On Tuesday, the European Parliament, the Council of the EU, and the Commission will launch trilogue negotiations on the European Digital Identity framework (eIDas), with the Swedish presidency eager to finalise its adoption by the end of its 6-months term.
In December 2022, member states adopted their common position, agreeing to amend the 2014 regulation on electronic identification and trust services for electronic transactions in the internal market (eIDAS regulation). Last month, the European Parliament followed suit.
The eID aims to create a public version of digital wallets in each member state in order to identify, authenticate or verify a series of aspects, including age, in any other EU country through a harmonised European digital identity facilitating interoperability and simplifying the use of digital services. Currently, only 14 EU member states, accounting for 60% of the total population, offer digital identification services to their citizens.
Thursday, 23 March – Bank of England to decide on interest rates
The Monetary Policy Committee (MPC) of the Bank of England (BoE) will meet on Thursday, with expectations high that it will increase interest rates for the eleventh meeting in succession to tackle persistent inflation. On 1 February, the Bank announced its tenth consecutive rate hike, raising interest rates by 50 basis points to 4%, the highest rate since 2008. The MPC decided with a majority of 7-2, with two of its members preferring to stick to a bank rate of 3.5%.
In January inflation softened to 10.1%, down from 10.5% In December, dropping for a third consecutive month, after reaching a 41-year high of 11.1 in October. To some extent, this could ease pressure on the BoE to keep raising interest rates. However, inflation is still more than five times higher than the BoE’s declared target rate of 2%.
Hence, markets widely expected one more rate increase in the UK, pricing in a 25-basis point hike. However, last week’s market turmoil with the collapse of U.S lender Silicon Valley Bank and the bailout of Credit Suisse could prompt the Bank to pause rates at 4.0% this week. This would be the first time without a hike since November 2021.
Earlier this month, the Office of National Statistics (ONS) released its monthly GDP estimate for January, revealing a stronger-than-expected growth of 0.3%, following a contraction of 0.5% in December. Nevertheless, the UK is the only G7 country yet to fully recover its lost output during the pandemic, with its level of GDP in Q4 2022 being 0.8% below its pre-Covid level at the end of 2019.
Thursday 23 - Friday 24 March - European Council to discuss Ukraine, energy and EU competitiveness
On 23 – 24 March, the European Council will meet to discuss continued support for Ukraine, energy security, and the EU’s push to boost its industrial competitiveness, especially in the area of green technologies.
The meeting will take place only a week after the European Commission unveiled the Net-Zero Industry Act and the Critical Raw Materials Act, both part of its Green Industrial Plan, the EU’s own response to the U.S Inflation Reduction Act of 2022 (IRA). The Plan, announced in February, aims to provide a more supportive environment for the scaling up of the EU’s manufacturing capacity for clean technologies in line with its ambitious climate targets.
The Net Zero Industry Act sets a target of producing at least 40% of the clean tech products that the bloc needs by 2030. The quicker deployment of renewables is expected to be achieved with simplified and fast-tracking permitting, the promotion of European strategic projects, the scale-up of technologies across the bloc, and the establishment of a ‘’European Sovereignty Fund‘’ at an EU level.
Furthermore, earlier this month the EU presented a plan to further relax its crisis state aid rule, introducing new subsidy rules for strategically important technologies. Germany is expected to support the further loosening of state aid rules in the upcoming Summit, backed by France. However, southern European countries and smaller member states argue that this could set a dangerous precedent where financially stronger member states can afford to inject a powerful stimulus into their industries.