A 50bp rate hike by the ECB this week looks to be a done deal at its meeting on Thursday. The focus will be on the size of the next rate rise at the March meeting and beyond. President Lagarde is expected to adopt a hawkish stance in line with the recent rhetoric from Governing Council members. Inflation is still too elevated, even if it is falling, with record high core inflation a particular concern to policymakers.
News since the last meeting in December has indicated more resilient economic activity. The effects of expansionary fiscal policies and easing supply bottlenecks, together with natural gas prices falling to their pre-war levels have all brightened the outlook in the euro zone. The relaxation of the China zero-covid policy means demand from Asia will also boost activity in the second half of the year. This may potentially worsen the inflationary outlook and go against the current theme of moderating price pressures.
A recent ECB sources article noting a slower pace of rate hikes going forward next month caused a stir in markets, but officials quickly rebuffed the idea. The peak policy rate is now seen at 3.5% by mid-year (150bps of rate hikes to come), so the bank will likely reiterate its December message that it needs to “stay the course” of policy tightening. That means the ECB will arguably become the most hawkish G20 central bank.
An upside surprise would see policymakers signal rate hikes will be needed into the summer. “Sizeable” rate moves after March would also be a shock and further underpin support for the euro. Hawkish expectations are quite lofty going into the meeting so any caution and data dependency from President Lagarde could see the single currency sold.
Here are the numbers to know ahead of the meeting:
