Bloomberg: ECB will slow down the growth of rates, preparing the market for QT

Source: Bloomberg

Author: Jana Randow

Article: Original article

Publication date: Thursday, December 15, 2022

The European Central Bank is ready to slow down the increase of interest rates and develop a plan to shorten its almost €5 trillion ($5.3 trillion) stash of bonds, bordering efforts for curbing inflation which still exceeds the target five times. 

After two subsequent 0.75% hikes, almost all (48 of 51) economists surveyed by Bloomberg forecast a 0.5% growth on Thursday. This will increase the deposit rate to 2% which is considered as not stimulating and not constraining the eurozone economy.

The more moderate increase may signal the upcoming peak of rates after the most aggressive tightening of monetary policy in ECB history. Last month, the inflation decreased for the first time in one and a half years though it remained in double digits.

ECB indicated the decrease in the growth of prices, and even some hawkish officials like Joachim Nagel from Germany and Klaas Knot from the Netherlands showed that they are ready to compromise.    

Thursday's half-point step will raise the deposit rate by 250 basis points compared with July. The economy will need time to adapt to this growth, and the Chief Economist Philip Lane of the ECB calls for gradual steps to guarantee that the ECB won’t suppress growth too much. 

Economists forecast that the ECB will increase the rate by 2.5% in 2023 which is quite below the 2.9% high currently awaited by the market. President Christine Lagarde will likely admit that the actions of this week won’t be the last. 

Lagarde will also announce the “key principles” of the way the ECB plans to cut the number of bonds accumulated as part of the Asset Purchase Program promising the “prudent and predictable” approach.

The exact details and terms will be later, maybe, at the February meeting. But the officials made it clear that they prefer to cut the balance by ceasing the reinvestments — a strategy already being used by the Fed — rather than selling bonds directly, like the Bank of England.

Opinions differ over whether monthly limits on balance sheet reduction should be set to avoid the market’s shock. But even if bond markets face problems, the ECB is likely to push QT forward because it has the reserves to deal with any consequences.

Forecast: growth of EURUSD