Ostrum AM: Quantitative tightening may start in Q2 2023

Ostrum AM: Quantitative tightening may start in Q2 2023

Central bank
Algemeen (03)

Axel Botte, Global Strategist, Ostrum AM, comments ahead of the ECB/BoE decision.

ECB

  • The ECB is likely to raise rates by 50 bps in a downshift from consecutive 75 bps increases. Deposit rate will be raised to 2%, with refinancing rates at 2.5%.
  • The hard part will be to communicate a new balance sheet strategy. The broad principles of QT should be unveiled today with details laid out at subsequent meetings. The ECB is expected not to reinvest in full more than € 330 billion maturities from its Asset Purchase Program portfolio in 2023. Quantitative tightening may start in Q2 2023 to give national Treasuries some leeway to launch large syndicated bond deals in January with continued support from the ECB full debt rollover.
  • Indeed, in 2023, net government bond issuance may fetch € 400 billion or even more as Germany surprised on the upside with net bond issuance of more than 120 billion next year. Lagarde previously said that QT would start once rate will have increased to around their peak level or terminal rate of 3%. This could be reached in March/April, so that the Q2 timing looks appropriate.
  • ECB doves will argue for lower caps to non-reinvested amounts, whilst stressing flexibility in reinvestments from other QE programs PEPP must be maintained to stem risks to financial stability. The recent large TLTRO prepayments must be factored in to calibrate the speed at which the APP will be wound down (although these are voluntary and do not reflect monetary tightening per se).


BoE

  • The BoE may raise rates by 50 bps today. We hope for clarity on the rate path. There were no unanimity in the last BoE decision, with 3 policymakers voting for 75 bps and one participant preferring a 25 bps move. The lack of a strong consensus is unhelpful. Should the BoE surprise, it could be on the downside as the Bank forecasts a prolonged recession even under a status quo scenario on rates at 3% (which is the current level).
  • Planned strikes, downside risks to activity and waning housing investment demand make it hard for the BoE to tighten a lot even as UK inflation still hovers about 10%. Prolonged fiscal easing (via government handouts to cover energy bills) would increase the deficit and add to inflation, which would further complicate the BoE’s decision.