La Française: The ECB, still no pause

La Française: The ECB, still no pause

13 juni 2023

ECB
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We anticipate that the European Central Bank (ECB) will increase the deposit rate by 25 basis points (bps) and officially announce the forecasted end in July of Asset Purchase Programme (APP) reinvestments.

The central bank is expected to revise its macroeconomic projections, likely reflecting lower growth rates for both 2023 and 2024. However, we do not expect a significant change in medium-term inflation forecasts, which are currently at 2.1% for headline inflation and 2.2% for core inflation in 2025.

Please find below our expectations: 

  • The ECB is expected to raise its key interest rates by 25 bps, bringing the deposit rate to 3.5% and the Refi rate to 4.0%.
  • The Governing Council (GC) is expected to maintain its meeting-by-meeting approach which will take into account incoming economic and financial data, underlying inflation dynamics and the strength of monetary policy transmission.
  • President Lagarde is likely to reiterate that there is still work to be done to bring inflation back to the 2% target in a timely manner.
  • The ECB is expected to confirm the end of Asset Purchase Programme (APP) reinvestments in July and keep the forward guidance for the Pandemic Emergency Purchase Programme (PEPP) unchanged, with reinvestments until at least the end of 2024.
  • We do not anticipate any announcements regarding Targeted Longer-Term Refinancing Operations (TLTROs) or Long-Term Refinancing Operations (LTROs).
  • Regarding new ECB staff economic projections, we expect to see lower growth rates for 2023 (revised downwards from 1.0% to 0.9%), 2024 (from 1.6% to 1.5%) and 2025 (from 1.6% to 1.5%). Due to lower energy prices and weaker growth, we anticipate slightly lower headline and core inflation figures for 2023 (compared to the March forecasts of 5.3% and 4.6%) and 2024 (2.9% and 2.5%), gradually converging to the 2% target in 2025 (consistent with the March forecast at 2.1% and 2.2% for headline and core inflation respectively).

In summary, we do not expect any change in the ECB's angle of communication during this meeting. The approach will remain data-dependent, with the possibility of pausing rate hikes after July, and ECB policy rates are expected to remain in restrictive territory for a longer period. We believe this committee will have a limited impact on financial markets.

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