La Française: Yes, more rate hikes, but more gradual!

La Française: Yes, more rate hikes, but more gradual!

May 3, 2023

Monetary policy ECB
ECB (07)

We expect that the European Central Bank (ECB) will slow down hike rates from 50 basis points (bps) to 25 pbs at its May meeting and that the Governing Council (GC) will halt Asset Purchase Program (APP) reinvestments as of the end of June 2023.

Please find below what we expect: 

  • The ECB to increase its key interest rates by 25 bps, bringing the deposit rate to 3.25% and the Refi rate (or refinancing rate) to 3.75%. The inflation figures published this week, still too high especially regarding 'core' inflation, could have led the ECB to continue rate hikes by increments of 50 bps. However, we expect the ECB to opt for a less aggressive approach because of the latest 'bank lending survey' which reports an already significant tightening of credit conditions.
  • The ECB to reaffirm the meeting-by-meeting approach dependent on the inflation outlook (next forecast in June), the dynamics of underlying inflation and the strength of monetary policy transmission. Christine Lagarde might also reaffirm that in the ECB’s base case, more rate hikes are to be expected.
  • The ECB to announce the end of APP reinvestments from the end of June while continuing to reinvest the proceeds of Pandemic Emergency Purchase Program (PEPP) redemptions.
  • Considering the still very high level of excess liquidity (more than €4 trillion), we do not expect any announcement on a new TLTRO, in replacement of the one expiring in June.

In summary, we think Christine Lagarde will adopt a rather hawkish tone to offset the shift from 50 bps to 25 bps increases and not appear too accommodative given that inflation is still very far from the target. All other things being equal, it could push European short-term rates and the Euro higher.

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