ECB meeting: Hawks still call the shots as bank set to hike rates by 75bps
Marcus Widén and Jussi Huljanen, economist and senior strategist at SEB, believe hawks will still call the shots when the ECB’s Governing Council (GC) convenes for the 27 October monetary policy meeting, where they expect key policy rates to be raised by another 75bps:
“The euro area economy is weakening, but it will take several months before the ECB can reasonably conclude that the economy and the labour market have softened to the extent that significantly lessens its inflation concerns. The hawks are still driving ECB policy and have continued to promote the need for large rate rises during the autumn, before slowing the pace once rates have reached a neutral level.
“The ECB will continue its aggressive tightening during the autumn. Expect all key policy rates to be raised by 75bps on 27 October, bringing the deposit rate to 1.50% and the refinancing rate to 2.00%. Thereafter, we forecast the ECB raising rates by another 75bps in December and 50bps in February 2023, resulting in the deposit rate peaking at 2.75% and the refinancing rate at 3.25%.
“The ECB’s own staff forecasts have so far projected a relatively resilient euro area economy, with 0.9% GDP growth in 2023, assuming that 20% of energy deliveries from Russia will continue to be supplied. The downside risk scenario of the ECB’s September staff projections assumes a total cut-off of energy supplies from Russia, resulting in the euro area economy shrinking by nearly 1% in 2023.
“A faster-than-predicted weakening of the euro area’s economic outlook could tip the scales to a smaller 50bps rate hike at the December meeting, when new staff projections will be published, and could possibly result in the deposit rate peaking in February 25-50bps below our current forecast of 2.75%. At the same time, inflation has continued to climb, and extensive fiscal policy measures introduced by the euro area governments, including Germany’s recent announcement of a EUR 200bn energy aid package, are contributing to inflation and thereby supporting continued sizeable ECB rate rises during the autumn.
“Since the previous ECB meeting on 8 September, forwards on market-based inflation expectations has continued to increase, especially further out on the curve. The forward CPI swap curve is upward sloping, with levels above 2.50% further out, suggesting that it is too early for the ECB to soften its tone on inflation risks. We think that market-based inflation expectations will begin to decline once spot inflation turns lower, but that will take some time yet.
“The euro area headline inflation increased to 10.0% year-on-year in September; we expect it to drift upwards for the rest of the year before lowering in 2023. Our forecasts for headline and core inflation are both above the ECB’s September staff projections, indicating that the ECB may have to make another upward revision to its inflation trajectory in December, when new staff projections will be presented.”
A copy of the full report is available here.
