Monex Europe: One last 75bps hike

Monex Europe: One last 75bps hike

Monetary policy ECB
Rente (04) inflatie

By Simon Harvey, Head of FX Analysis at Monex Europe, commented on the upcoming ECB meeting:

At the ECB’s last meeting in September where they hiked rates by 75 basis points to 0.75%, President Lagarde outlined that the central bank would be taking a meeting-bymeeting approach, while also stating that it would take “more than two meetings but less than five to get to the end of hikes”. Under this guidance and with the tightening bias still in full swing, the emphasis rests on how the economic outlook has evolved in order to determine the next hiking increment.

With inflation rising, energy prices moderating, and hard data pointing to a stagnation in growth in Q3, we think economic conditions remain broadly unchanged from September’s meeting and continue to justify another 75bps hike to shield against the growing risk of second-round effects. This view is in line with both market pricing and the broad consensus among economists, both of which have been consistently guided by a deluge of hawkish ECB commentary over previous weeks.

Given this, the market impact from next week’s policy decision will likely take a broader context as focus migrates to the level of forward guidance presented by the Governing Council’s and President Lagarde’s communications, technical decisions on how to change the remuneration of excess liquidity, and future plans to shrink the balance sheet.

This would follow similar guidance presented by the French Governor Francois Villeroy de Galhau this week and would see the deposit rate sit at the top of the ECB’s perceived range for neutral rates (2%) come year-end. Secondly, we expect a decision to be made with regard to the excess liquidity that remains in the banking system now the interest rate channel sits outside of negative rates. The options at the ECB’s disposal are broad, and we have no precedent to refer to either, but the consensus is forming around a reverse tiering approach similar to that used by the Swiss National Bank. Finally, on quantitative tightening, we expect President Lagarde to confirm that discussions are being had internally, but that no decision will be finalised until rates exit neutral territory (2023 in our base case).