Reuters: Five questions on the eve of the ECB meeting

Source: Reuters

Author: Dhara Ranasinghe, Naomi Rovnick and Stefano Rebaudo

Article: Original article

Publication date: Friday, December 9, 2022

5 key questions on the eve of the ECB meeting on December 15: 

1. What will the ECB do?

Markets expect a rate hike by 50 basis points after two subsequent increases by 0.75%, which would slow down the pace of tightening.

Nevertheless, the ECB is likely to remain hawkish, and investors would look for clues on where the rate will go further.

Money market pricing suggests that the rates would peak in June 2023 at about 2.7%, though some experts think the rate will end up to be higher, as the underlying price pressure is still strong.

Economists from Deutsche Bank forecast the final rate at the level of 3%, with risks skewed to the upside. As it was said by Francis Yared, global head of rates research at Deutsche Bank, it’s necessary to admit that the future trajectory of rates is an open question for markets and central banks.

2. Has the eurozone inflation reached its peak?

In November, headline inflation slowed down to 10% for the first time in a year and a half, thus raising hopes that a peak of price growth was passed.

Nevertheless, inflation is still above the target level of 2%. As it was said by Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management, ECB President Christine Lagarde would probably be more careful after the "big mistake" made last year, when she was stating that a surge in prices was temporary.

Meanwhile, ECB Chief Economist Philip Lane suggests that wages would be a "primary driver" of price inflation even after energy price shocks are over.

3. Will the ECB discuss QT?

Probably. The key part of the upcoming ECB debates is how to reduce the bonds held on its balance sheet in what is known as quantitative tightening (QT). 

The ECB might offer some recommendations on how QT will be applied to its 3.3 trillion euro assets, and it will probably be asked for more details.

Patrick Saner, head of macro strategy at Swiss Re, said that partial reinvestment would be started in February, and it would be similar to what the Fed does.

It’s suggested that active bond sales would be ruled out for now.

4. Does the ECB believe a recession will be shallow?

Business activity data proves a moderate recession, and the latest forecasts should show how the ECB views the coming slowdown.

In September, the ECB predicted GDP growth in the euro area of 0.9% in 2023, which is rather lower than the June forecast.

UBS's chief European economist Reinhard Cluse expects the ECB to lower its GDP growth forecast to 0.5% for next year, given the clear slowdown and two quarters of negative dynamics. However, according to him, a deep recession is unlikely.

5. ECB policymakers have different opinions on the matter? 

Philip Lane and Isabel Schnabel, who lead the debate at the ECB board, expressed opposing views. Lane believes that record price increases will begin to slow down next year. Schnabel argues that the longer inflation remains high, the greater the risk of it taking root. The result could be a compromise. 

Danske Bank chief analyst Piet Haines Christiansen believes since the doves are vocal again, hawks aren’t the only ones who will define the monetary policy. Thus, the biggest compromises are coming.

Forecast: EURCAD continues to grow