Questions to ECB on inflation
2022.12.12 02:56
Questions to ECB on inflation
Budrigannews.com – As inflationary pressures begin to show signs of abating, the European Central Bank is expected to slow the pace of its aggressive interest rate hikes when it meets on Thursday.
To contain soaring inflation, it has increased rates by a total of 200 basis points (bps) since July, the fastest pace on record.
Although the European Central Bank (ECB) is far from finished raising interest rates, markets want to know where the key deposit rate will end up.
Frederik Ducrozet, Pictet Wealth Management’s head of macroeconomic research, stated, “They (policymakers) will keep sounding hawkish and aggressive as they want inflation expectations to remain anchored.”
The five most important questions that markets should be thinking about are listed below.
After two straight increases of 75 bps, the pace of tightening is being slowed by expectations in the markets for a 50-bps increase.
However, investors will also be looking for clues regarding the direction of the deposit rate, and the ECB is likely to remain hawkish.
According to pricing in the money market, interest rates will reach their highest point in June 2023, when they will be around 2.7%. However, there are those who believe that the rate will ultimately rise because underlying price pressures will continue to be strong and expansionary fiscal policy may increase inflation.
ETR: Deutsche Bank Economists predict a terminal rate of 3% and upside risks.
Francis Yared, the global head of rates research at Deutsche Bank, stated, “We must accept that the future rate path is a discovery process for markets and central banks.”
In November, headline inflation slowed to 10% for the first time in one and a half years, raising hopes that the sky-high price growth is over.
However, inflation remains above the target of 2%. According to Ducrozet of Pictet, ECB President Christine Lagarde will likely be cautious about declaring a peak following the “big mistake” of insisting that price increases were “transitory” last year.
Inflation is at 5%, excluding food, fuel, alcoholic beverages, and tobacco, and pipeline pressures are still prevalent. ECB Boss Financial expert Philip Path figures wages would be a “essential driver” of cost expansion even after energy cost shocks blur.
Probably. The ECB’s policy debate centers on how to reduce the amount of bonds held on its balance sheet during quantitative tightening (QT).
The ECB is likely to be pressed for specifics regarding how QT will affect its 3.3 trillion euro Asset Purchase Program.
Patrick Saner, head of macro strategy at Swiss Re (OTC:), stated, “It is most likely that a start in February with partial reinvestment similar to what the Fed does.”
It was anticipated that there would be no active bond sales at this time.
4/ Does the ECB anticipate a brief recession?
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The ECB’s perspective on the upcoming slowdown should be demonstrated by the most recent forecasts and closely watched data on business activity.
It significantly revised down its June forecast in September, predicting growth of 0.9% in the euro area in 2023.
UBS’s central European financial specialist Reinhard Cluse anticipates that the ECB should lessen its standpoint to 0.5% development for the following year, with “the evaluation that we are plainly dialing back and two fourth of negative development could well happen, however a profound downturn (is) probably not going to be their center situation.”
5/ The outlook is divided among ECB policymakers; what does this indicate?
On the ECB board, Lane and Isabel Schnabel, who lead the economic debate, have recently offered opposing viewpoints.
Path accepts record value development will begin to die down the following year. Schnabel argues that the likelihood of inflation taking root increases the longer it is allowed to remain high.
Lagarde could be asked how she feels about the fights between high-ranking officials. The outcome might be a deal.
According to Danske Bank chief analyst Piet Haines Christiansen, “with the doves being vocal again, we are looking into a period where hawks will not be the only ones trying to drive the monetary policy, which means that we will see bigger compromises.”
