La Française AM: no significant impact anticipated from ECB

December 13, 2023

ECB projections anticipated to indicate weaker forecasts for growth and inflation. Inflation projection for 2026 expected to aligning with the 2% target.

As suggested by ECB members, the Governing Council will maintain its interest rates at the December meeting. ‘The pivotal focus is on the updated macro-economic projections, particularly since the latest inflation data fell below the central bank's expectations,’ says La Française AM today. ‘We anticipate these projections will indicate weaker forecasts for growth and inflation. Notably, the ECB is expected to unveil the inflation projection for 2026, aligning it with the 2% target. Additionally, we anticipate an ECB announcement regarding an accelerated pace of quantitative tightening.

Anticipated outcomes include:

• The ECB maintaining its key interest rates at 4.0% for the deposit rate, 4.5% for the Refi rate, and 4.75% for the marginal lending facility.
• The Governing Council maintaining its meeting-by-meeting approach and reiterating guidance that sustained restrictive rates will prompt inflation to return to target in due course. Christine Lagarde will emphasize that the ECB cannot claim victory yet.
• The ECB's probable announcement of the gradual conclusion of pandemic emergency purchase programme reinvestments next year, with details expected in January. We anticipate the ECB will likely rule out outright bond sales from either the asset purchase - or pandemic emergency purchase programme portfolios, as suggested by Isabel Schnabel to Reuters.
• Projected weaker growth in 2023 and 2024. Inflation projections for 2024 and 2025 will be key; we expect those forecasts to be lowered from 3.2% and 2.1% to 2.7% and 2% respectively.
• In summary, given the recent comments from most ECB officials, there seems to be a gradual shift towards a more dovish stance within the GC. President Christine Lagarde will likely emphasize the efficiency of monetary policy tightening, noting the slowdown in bank lending growth, economic weakening and the faster-than-expected decline in underlying inflation. She might caution against early 2024 interest rate cuts due to uncertainties in wage growth and weak productivity. However, market sentiments might overlook Lagarde's warning, and consequently, we do not anticipate a significant impact from this meeting.’