abrdn: Commentary ahead of ECB meeting

abrdn: Commentary ahead of ECB meeting

April 28, 2023

ECB
ECB Europees Centrale Bank.jpg

Paul Diggle, Chief Economist at abrdn, comments ahead of ECB meeting next week:

The European Central Bank is clearly undecided between a 25bps and 50bps increase at the 4 May meeting. At its previous meeting, the ECB had suggested a step down to smaller 25bps hike increments was coming. But recent press comments from more hawkish members of the central bank have kept a larger 50bps hike on the table.

They’ve been pointing to the strength of underlying inflation pressures generated by the tightness of the labour market and the resilience of demand. The outcome of German public sector pay negotiations also plays to the hawks’ argument, with the government and the unions striking a deal that averages out at around a 6% pay increase for both this year and next.

We think that the ECB’s decision between a 25bps and 50bps rate hike won’t be finalised until the April flash inflation data is released, two days before the meeting. For now, our baseline is a 25bps hike, but another strong core inflation print would tip the balance towards a larger hike.

We are then expecting at least another additional rate hike at the June meeting, before a pause and an eventual rate cutting cycle during 2024.

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