La Française: Pre-ECB commentary

La Française: Pre-ECB commentary

March 9, 2022

ECB
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By François Rimeu, Senior Strategist, La Française AM

The supply shock and the risk of stagflation will not derail policy normalization by the ECB. Buzzwords: flexibility and data-dependency.

The European Central Bank (ECB) will hold its quarterly press conference on March 10. The Governing Council (GC) will update their macro-economic projections with more inflation pressure but downside risks to growth. The ECB may pursue the gradual normalizing of its monetary policy despite uncertainties coming from Russia’s invasion of Ukraine.

Please find below what we expect:

  • We expect the ECB to keep as much optionality as possible (Philip Lane: “The ECB won’t have final answer on war impact this week.”)
  • We expect the ECB to delay the point at which it provides the market with more concrete guidance as to the future of the asset purchase programme (APP) but we see the central bank continuing to talk about its intentions to gradually dial back policy accommodation.
  • We expect the ECB to emphasize that the purchases could be stepped up again or resumed if required (i.e., in the event of renewed market fragmentation).
  • On the economic front, we expect the ECB’s inflation projections to be revised significantly higher in 2022 (from 3.2% to 5.7%), showing inflation above 2% in 2023 (from 1.8% to 2.1%) and at 2% at the end of the forecast horizon. On the growth side, projections will indicate lower growth in 2022 (from 4.2% to 3.8%) and in 2023 (from 2.9% to 2.5%) and unchanged in 2024 (1.6%).
  • We do not expect any announcement on the new series of targeted longer-term refinancing operations (TLTRO) or on tiering increases.

All in all, we expect very little from the ECB this week. The situation is too uncertain and the negative impact on economic growth is impossible to assess right now. The same is true regarding medium-term inflation expectations. It does not mean a dovish meeting as we expect President Lagarde to reiterate the ECB’s will to reduce its accommodative stance over the course of 2022.

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