Monex Europe: ECB to hike 4% in a close call

Monex Europe: ECB to hike 4% in a close call

September 11, 2023

ECB
Inflatie (05) rente

With the eurozone economy slowing, but not necessarily to a degree that it weighs heavily on consumer prices, progress on disinflation persisting, but not at a pace that will give the ECB much confidence, and conditions in the labour market remaining historically tight, we think the ECB should hike the deposit rate to 4% and then hold to avoid having to resume its hiking cycle at a time when the economy is in a much more precarious position.

Put another way, we think the ECB has a limited hiking window, after which any subsequent hikes will likely tip the eurozone economy into recession should the progress on disinflation stall. The optics on this alternative scenario are far from ideal for the central bank. While some have argued for a pause and a hike, similar to the Fed in the summer months, we think this would require a rebound in the next two sets of eurozone PMIs. While this is possible, it would entail a big gamble from the central bank.

Our view for one final hike should be confirmed in the latest ECB staff projections, where we expect near-term growth forecasts to be revised to near flat, but for the ECB’s confidence in returning inflation to target to only marginally increase, leading to a minor downgrade in the 2025 inflation forecast to 2.1%—a level that justifies the additional hike.

For the euro, a hike by the ECB next week should be positive in the near-term as it would narrow front-end nominal rate differentials with the US. However, in the environment of stagnant growth and potential recessions, we think the rate hike will ultimately be viewed as net-negative for the euro over the medium-term as it weighs further on the prospective returns of eurozone assets.

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