abrdn: ECB to issue new directive

abrdn: ECB to issue new directive

June 2, 2022

Central bank ECB
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The ECB is set to revise both its forecasts and guidance on the June 9th meeting, after the latest rise of inflation prompted even the most dovish policymakers to change stance. Below is the outlook from Pietro Baffico, economist at asset manager abrdn, on the ECB meeting next week.

Investors can expect the ECB to announce an early end of the net QE purchases, ahead of the policy lift-off in July, which looks like a done deal.

The guidance should also indicate an exit from negative territory, but it might not yet detail the speed of subsequent policy adjustments given the diverging views within the Governing Council. In a recent blog post, President Lagarde advocated for the next stage of policy normalization to be carefully calibrated, highlighting the risk of an economic slowdown. But a faster tightening cycle might be advocated by more hawkish governors, whose cause has been gaining ground - alongside inflation - over recent months.

The divergence of views, a slowing economy, and the flexibility retained by the ECB will likely translate into more market volatility for rates and bonds. Lurking recessions risks could also prompt investors to price different premia across European bonds, causing spreads to widen and eventually requiring the ECB to intervene.

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