M&G: ECB still assuming mild recession

M&G: ECB still assuming mild recession

December 16, 2022

ECB
europese centrale bank (ECB).png

M&G comments on yesterday's ECB meeting:

'Unlike the November meeting which will be remembered as a dovish 75bp hike, today’s ECB meeting was a very hawkish 50bp move higher. And the messages were crystal clear; the ECB expects the Eurozone to have a shallow recession, the inflation outlook has been revised up substantially, interest rates will have to rise significantly and steadily (i.e. expect several more 50bp hikes), and be sufficiently restrictive. During the Q&A and in reference to this latter point, Lagarde essentially admitted that the market’s terminal rate of 3% was too low. We also got more information on QT, which has been guided to start from March 2023 onwards at €15bn per month. But without the details until February, this carried less significance when compared to the strong messaging.

So why not just go in for a 75bp hike, which some members of the Governing Counsel, such as Schnabel, were advocating? The way we see it, it was all about controlling the curve and removing the market’s obsession with central bank “will they, won’t they” pivot. To achieve this, the ECB decided to use forward guidance to deliver the hawkish tone, and in doing so targeting rates further out along the curve, rather than having today’s policy rate decision do all the heavy lifting.

The volte-face from the November meeting is a strong message to markets that inflation risks are still very real across the euro-area, despite lower energy price inflation. Growth is not the primary concern and the recent rally in risk assets was too premature. We still have a ways to go.'

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