La Française: The ECB will need to act ‘forcefully’ with an aggressive move of 75 bps to tame inflation

La Française: The ECB will need to act ‘forcefully’ with an aggressive move of 75 bps to tame inflation

September 6, 2022

Interest Rates ECB
ECB (5).png

Pre-ECB commentary by François Rimeu, Senior Strategist, La Française AM

At the September meeting, we expect the European Central Bank (ECB) to raise interest rates by 75 basis points (bps).

Please find below what we expect:

  • The ECB will most likely increase interest rates by 75 bps, bringing its deposit rate to 0.75%. The inflation picture has deteriorated further since the July meeting with core inflation rising to 4.3% YOY, a further broadening of underlying price pressures and slightly higher inflation expectations. 
  • We expect ECB officials to retain their meeting-by-meeting approach and refrain from explicit forward guidance on the pace of future hiking.
  • We do not expect ECB President Lagarde to provide guidance on the level of the neutral or terminal rate.
  • We do not expect an announcement on the end of Asset Purchase Programme reinvestments, but ECB President Lagarde could indicate that discussions will start soon.
  • The ECB will most likely announce some changes to remuneration on excess liquidity given positive real rates.
  • New ECB staff projections will likely cut ECB growth projections sharply considering the slowing momentum and the ongoing energy crisis. 2022 projections will likely remain unchanged or include small changes (Q2 growth was strong), but we expect significant revisions on 2023 projections.
  • We expect the ECB’s inflation projections to be revised higher in 2022 (from 6.8% to 8%) and 2023 (from 3.5% to 4.5%) and then to decline close to the 2% target in 2024.

We believe the ECB will deliver a hawkish message this week, reflecting its commitment to bring inflation back to its 2% target. At this stage, the Governing Council will in our opinion opt for a restrictive stance despite economic slowdown. It will likely push rates slightly higher and lead to a flattening of the yield curve.

Related posts