Monex Europe: Market impact ECB decision depending on guidance over next steps

Monex Europe: Market impact ECB decision depending on guidance over next steps

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Due to the broad consensus over this week’s ECB meeting, the market impact from Thursday’s decision will predominantly hinge on the Governing Council’s guidance over their next steps.

Simon Harvey, Head of FX Analysis at Monex Europe, expects most of this will occur indirectly through the updated Staff projections, although he can’t rule out that President Lagarde will take a more explicit stance in the press conference and massage market expectations while stressing the central bank’s data dependency.

In terms of the staff projections, Harvey expects a larger drag from energy markets and a higher assumption for interest rates will lead to a lower forecast of HICP inflation, but greater momentum and a higher starting point will warrant upward revisions to the core inflation forecast. Meanwhile, he thinks some focus will also rest on the unemployment and growth forecasts.

In terms of growth, Harvey doesn’t expect the ECB to officially rule out a recession this year, especially given recent data revisions, but he thinks this will have little impact on their overall forward guidance. Instead, the focus will be on how quickly they expect growth to return to pre-pandemic rates.

Harvey thinks that a stronger growth profile coupled with an upwards revision to core inflation will only play into the hands of the hawks, compounding his view that the ECB are more likely than not working on the assumption that they will raise rates a further 50bp in May before decelerating the pace of tightening.

However, with rates then much closer to 4% -- a level in which the political rift within the Governing Council may ultimately stall the hiking cycle – it Harvey considers likely that any formal recognition of this working assumption will invite more doves to speak out publicly, as Ignazio Visco has in the past week following hawkish guidance from Robert Holzmann.

For that reason, Harvey cautions investors to stay vigilant for any Reuters 'ECB sources' stories around this week’s decision.

Ultimately, Harvey thinks that the mix of the ECB’s forecast revisions will make it difficult for the doves amongst the Governing Council to push for the central bank to explicitly guide markets to a deceleration in the hiking cycle as early as next week’s meeting. Comparatively, the hawks amongst the Governing Council have a firm case to put forward to formally recognise that a further 50bp will take place at the May meeting should core inflation show no signs of abating.

While Harvey ultimately expects President Lagarde and the rate statement to steer clear of providing an explicit path for rates going forward, instead stressing the central bank’s data dependency, he expects the tone of the central bank decision to lean on the hawkish side on average. This may prove unpalatable for doves amongst the GC, and as such, he expects the debate on the next steps to reignite in the public domain in the next six weeks. 'Be prepared for the argumentative ECB of old,' he adds.