Below is a commentary by Frederik Ducrozet, Head of Macroeconomic Research, and Nadia Gharbi, Senior Economist at Pictet Wealth Management with their predictions for this Thursday's ECB meeting (2 February 2023).
We think the ECB has no real choice but to hike rates by 50bps next week, and to reiterate its hawkish guidance from December. Activity data have been more resilient than expected, driven by the sharp drop in gas prices but also ongoing resilience in the services sector, while inflation remains way too high for the ECB to hint at a slower pace of tightening.
We expect the statement to reiterate the ECB’s commitment to raise policy rates “significantly at a steady pace to reach levels that are sufficiently restrictive to ensure a timely return of inflation to the 2% medium-term target”, consistent with a third consecutive 50bps hike in March. That is when things will become more interesting. One lesson from the past few months is that committing to a rate path several months in advance can bring unnecessary confusion, and sometimes disagreement among ECB members. With policy rates entering restrictive territory as the economy slows and inflationary pressures start to ease, such disagreements should become more visible.
We believe that the ECB will stop committing to a rate path (or to the size of rate hikes) beyond March. Instead, President Lagarde may insist on future decisions being more data dependent, with a growing focus on core inflation (which has yet to peak) and wage growth (which is likely to pick up more quickly in H1 2023). Inflation and wage data will help the ECB decide how restrictive the monetary stance needs to be eventually, in order to secure a gradual return of inflation to its 2% target. Our baseline remains for the ECB to raise the deposit rate to 3.50% in May, with a risk that they step down to 25bps rate hikes at some point.
The ECB is also expected to unveil more details on Quantitative Tightening (QT) next week, although this is likely to be a distraction for markets. QT implementation details will include the how the ECB intends to reduce its Asset Purchase Programme (APP) holdings by €15bn per month in the context of uneven redemptions across markets, countries and maturities, while avoid too large deviations from capital keys of the medium-term. We still expect the ECB to increase the pace of QT in H2 2023, most likely by stopping APP reinvestments altogether, but this is likely to be discussed at a later stage. Last but not least, the ECB will likely welcome the early repayments of TLTROs as broadly consistent with their normalisation strategy.
