La Française: Bank collapse won’t affect ECB course

La Française: Bank collapse won’t affect ECB course

Monetary policy
Geld euro ECB

Will the ongoing collapse of US regional banks lead the ECB to adopt a less restrictive approach?

Until now, it was widely expected that the European central bank (ECB) would raise its interest rates by 50 bps at its next meeting. The question now is if the ongoing collapse of US regional banks could lead them to adopt a less restrictive approach.

Updated staff projections are likely to show much lower headline inflation this year, but faster GDP growth and higher core inflation, with minimal adjustment to both over the medium-term horizon, according to François Rimeu, Senior Strategist at La Française AM, today. They expect:

  • The ECB to increase its key interest rates by 50 bps, bringing the deposit rate to 3.0%, despite current turbulence coming from US regional banks.
  • President Christine Lagarde to repeat that the Governing Council’s (GC) priority is to return inflation to the 2% target.
  • The forward guidance will likely be as neutral as possible, keeping all options open, especially given the visible divisions within the Governing Council and the situation of US regional banks.
  • Mrs. Lagarde will emphasize that the board will adjust its policy trajectory according to incoming data on inflation, the evolving outlook and the transmission of its monetary policy.
  • The ECB won’t maintain its February assessment on the inflation outlook given the latest strong inflation data.

The team at La Française AM don’t expect any news on the pace of Quantitative Tightening, but have the following economic projections:

  • The ECB will indicate higher growth in 2023 (from 0.5% to 0.7%) but lower GDP in 2024 (from 1.9% to 1.5%). For 2025, we expect growth will stay close to potential growth at around 1.8%.
  • The ECB’s global inflation projections will be revised lower over the projection horizon given changes in technical assumptions (higher market rates, a stronger euro and lower energy prices) with 2,1% in 2025 (versus 2.3% in December projections).
  • The ECB’s core inflation will be revised higher in 2023 (from 4.2% to 4.6%) and remain broadly unchanged over the next two years, at 2.8% in 2024 and 2.3% in 2025.

‘At the time of writing, the market is no longer expecting a 50bps hike coming from the ECB (33bps priced). We think that the ECB will most likely ‘stick to the plan’, which means higher rates on the very short end of the curve,’ concludes Rimeu.