Feb 3, 2023
Most Banks See ECB Slowing Interest-Rate Hikes After March
(Bloomberg) -- Most economists predict the European Central Bank will slow the pace of its interest-rate hikes following another half-point increase in March.
Banks including Morgan Stanley, Commerzbank and ING predict the deposit rate will peak in May at 3.25%, while analysts at Goldman Sachs, Credit Suisse and Citi see one more quarter-point hike in June.
The ECB on Thursday raised its deposit rate to 2.5% from 2%, as expected, and flagged another such increase at its next meeting. President Christine Lagarde said the Governing Council would then “evaluate the subsequent path of our monetary policy” — a comment that was widely understood as signaling a moderation in tightening.
Here is a rundown of what banks now predict:
“We expect the ECB to ‘stay the course’ and move rates into sufficiently restrictive territory, with a third 0.5% rate hike in March — as confirmed today — which is likely to be followed by two further 0.25% rate hikes in May and June, implying a 3.5% terminal rate in the summer. That said, a meeting-by-meeting approach beyond March creates uncertainty around both the pace and magnitude of tightening from the second quarter”
“There are only very few data releases from here until the March meeting that could inform the ECB decision away from the indicated 50 basis-point rate hike. A set of rather weak PMIs, or material downside surprise on the core inflation side, could potentially move the needle, but neither of the two is in line with our base-case scenario”
“The market’s dovish reaction to the meeting – weaker euro, lower sovereign yields and tighter peripheral spreads – seems premature to us, as neither the central bank’s rate guidance nor underlying inflation developments suggest the end of the hiking cycle is near”
“It looks like the ECB is rather taking the risk of doing too little than too much tightening to reach the target. We worry that this is not sufficiently ambitious, raising risks to inflation expectations and making the return to 2% inflation harder”
“Given that the ECB will have new forecasts at its disposal at the March meeting, it is natural that Lagarde was reluctant to give guidance beyond the March meeting. However, Lagarde’s comments strongly suggest that the ECB is planning to continue rate hikes also beyond March. It would also be a bit odd, if they were sufficiently confident that a 50 basis-point rate hike was needed in March and then thought no further hikes were needed after that”
“As long as core inflation remains stubbornly high and core inflation forecasts remain above 2%, the ECB will continue hiking rates. The increasing probability that a recession will be avoided in the first half of the year also gives companies more pricing power, showing that selling price expectations remain elevated”
“We continue to expect the deposit rate to peak at 3%, which implies that the 50 basis-point rate hike in March would be the final one and that rates will be kept on hold for a while after that. We think that over the coming months it should become clear that euro-zone GDP will contract moderately during most of 2023, as the impact of monetary tightening comes through. This also means that labor-market conditions are set to deteriorate, during the course of the year, which should help reduce wage growth in the second half of the year and in 2024. Also, inflation could come down much more quickly than the ECB projected in its December forecasts. Meanwhile, we have penciled in a pivot by year end, with rate cuts beginning in the fourth quarter.”
“So far, the doves on the ECB Governing Council have gone along with raising rates into restrictive territory. But as inflation looks set to decline, we expect them to push back against further major rate hikes in the second quarter”
“The many doves in the ECB Governing Council are likely to use a further fall in the inflation rate in May as an argument to reduce the pace of interest-rate hikes to 25 basis points. The deposit rate would then be 3.25%” but “a deposit rate of 3.25% will not be enough to push inflation back to 2% in the medium term. Instead, we continue to believe that a deposit rate of about 4% is necessary”
“While the number and the magnitude of future rate hikes is, legitimately, a matter for future discussion, we do not read in today’s communication reasons to expect that, if members of the Governing Council were publishing ‘dots’ to convey their estimates of the peak policy rate, those dots would be any lower than they would have been in December, notwithstanding the fall in energy prices”
“The ECB continues its odd relationship with forward guidance. Although the Governing Council maintains that future decisions will continue to be data-dependent, and based on a meeting-by-meeting approach, they once again jumped the gun, virtually pre-committing to another 50 basis-point hike in March. Sure, Lagarde caveated that statement, explaining that ‘intend is a strong word, but not irrevocable.’ Nonetheless, it is now very difficult to backpedal without a loss of credibility”
“While today’s ECB message was undoubtedly hawkish again, it lagged somewhat behind market expectations. Most importantly, this time, Lagarde did not actively push back against market expectations as she did in December. Markets not only expect a terminal rate of only 3.40% but have also started to price rate cuts toward the end of the year. As a result, equities gained, sovereign yields receded, and the euro lost. Apart from the terminal rate, a key message from today’s meeting is that the peak rate will be maintained for longer. We think that markets have not yet fully digested this message.”
“Lagarde sounded less hawkish than in December, reflecting the assessment that inflation risks, while remaining tilted to the upside, have become more balanced as energy inflation drops sharply. However, the strong focus on underlying inflation – which has not turned yet – is likely to keep the Governing Council in tightening mode beyond March”
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