abrdn: ECB raises by 50 or 70 basis points, then in small steps

abrdn: ECB raises by 50 or 70 basis points, then in small steps

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ECB (07)

Pietro Baffico, European Economist at abrdn, looks ahead to the ECB meeting on the 8th September. Baffico expects the hawks to prevail and for the ECB to come up with an interest rate rise of 50 or 75 basis points. This may be followed by smaller rate hikes in October and December. 

He also points to risks around the Italian government debt and the impact of an interest rate increase on the position of the euro that the ECB should take into account:

“It will be another interesting meeting for the ECB on the 8th September as policymakers are caught between fading growth and concerns of de-anchoring inflation expectations. The ECB already abruptly abandoned its forward guidance in July, delivering a 50bps hike, as even the most dovish policymakers revised their stances given the relentless surge of prices.

We believe the high inflation, at 9.1% in August, keeps the ECB under pressure to frontload its tightening cycle. The upcoming hike seems a close call between a 50bp and 75bp, with the latter being increasingly considered. Indeed, since the hawkish tones at Jackson Hole, more and more governors advocated to “act forcefully” and are sending a strong signal of determination. The pace of tightening should moderate afterwards, with smaller increments likely in October and December. The outlook for 2023 is more clouded, given the uncertainties of the energy shock, but we would expect the ECB to pause its cycle once a recession has hit.

The central bank is also set to revise its macroeconomic projections in September, which should acknowledge a lower growth path and higher inflation. It remains to be seen whether the inflation outlook would still reach the 2% target at the end of the forecast horizon.

The risk for investors is a return of sovereign stress, particularly around elections in Italy. Views on the APP reinvestment policies could also be discussed, even though a decision might come at a later time. Another risk for investors is more EUR vulnerability. While an accelerated tightening would provide support for the currency, the stagflationary energy shock seems set to undermine it.”