This Thursday’s ECB meeting will serve to update growth and inflation estimates for the coming years. Several analysts agree in expecting a significant reduction in GDP estimates, and an increase in CPI, as a consequence of the sharp deterioration of the economy seen from a geopolitical, macroeconomic and market dynamics point of view since the month of March.
We have received some insights from the professionals within the asset management industry, on what to expect from this Thursday’s meeting.
Martin Wolburg, Senior Economist, Generali Investments
Euro area inflation jumped to a high of 8.1% yoy in May, four times the ECB’s target. We expect it to stay around these levels over the coming months. The war-related energy and food price rises contributed to more than half of it. But also underlying inflation pressure will stay very high, e.g. producer prices were up by 37.2% yoy in April.
Headaches at the ECB will worsen. Negotiated wage growth accelerated to 2.8% yoy in Q1, the highest in more than 10 years. It is one of the key metrics the Governing Council (GC) looks at to assess second-round effects. It comes on top of medium-term market inflation expectations above 2% and professional forecasters seeing inflation averaging 2.1% over the next five years.
GC members unanimously underline the need to act. At the June 9 meeting an end of QE by July and indication of a July rate hike seem a done deal. How fast will the ECB proceed? Some GC members even argue for a 50 bps hike while markets are pricing cumulative 125 bps hikes by year-end. We still expect more measured steps as activity will moderate and fragmentation risks increased. But given the latest data we now deem four consecutive 25 bps hikes (July, Sep., Oct., Dec.) in 2022 somewhat more likely than just three.
Gilles Moëc, Chief economist at AXA Investment Managers
We see little reason to expect agreement on a clear mapping of the ECB’s next moves. However, at the very least, the ECB will have to clarify quantitative easing.
What matters is the amount of tightening that will be delivered in the coming months. In the forward guidance we propose, the first increase in July would be implicitly limited to 25 basis points, leaving September to bring the deposit rate into positive territory.
We have also noted that the probability of a 50 bp hike, in reaction to the recent acceleration in inflation, is increasing. Another scary inflation print in June is probably all it would take to get to 50.
It is not yet clear how the bond market will react to the effective termination of purchases. The Governing Council would do well to take the market reaction into account before taking more forceful action, although there is no denying that there is a general appetite at the ECB to proceed more quickly with a return to neutrality […] but the ECB will be ‘held back’ by a deterioration in macroeconomic conditions before reaching neutrality.
Konstantin Veit, portfolio manager at PIMCO
Given that the ECB is more concerned about inflation dynamics than growth, we believe that the process of monetary policy normalisation, which started in December last year, will continue. The Governing Council will probably decide to end net asset purchases under its regular asset purchase programme this month, and prepare the market for interest rate hikes in July and September, the first in the euro area in the last eleven years.
President Lagarde and chief economist Lane recently favoured an initial 25 basis point hike in July, followed by another 25 bp hike in September, bringing the key ECB rate back to 0% in the third quarter after eight years in negative territory. The market is pricing in around 120 basis points of rate hikes by the end of this year, essentially 25 basis points of rate hikes at each policy meeting in the second half of the year, with some likelihood that the ECB will do more than that, given the high uncertainty around inflation, which remains elevated. This makes another sizeable upward revision to the ECB’s quarterly inflation projections at the upcoming June meeting in Amsterdam almost certain.
While the ECB will continue to emphasise that it is closely monitoring monetary policy transmission across jurisdictions as it normalises policy, we do not believe that the ECB will present a framework or mechanism to address potential fragmentation issues in the near future. Rather, and in line with the past, we think the ECB will prefer to respond to major exogenous shocks with tailored solutions, which speaks to a risk that markets will test the ECB’s willingness to neutralise any non-linear market response that may arise from rate hikes. We believe that the ECB will increase the deposit facility rate as well as the main refinancing rate by the same amount, while keeping the interest rate corridor unchanged, as a tightening of the interest rate corridor would reduce the incentive scheme embedded in current long-term refinancing operations and discourage money market activity in general.