To combat inflation, the European Central Bank is prepared to announce another significant interest rate increase on Thursday. Less is known about what happens next.
Speaking recently in Davos, ECB President Christine Lagarde emphasised the importance of maintaining the current monetary policy.
Investors are interested in learning how long and how much more the central bank will raise interest rates.
Carsten Brzeski, head of global – macro at ING, said ECB policymakers believe they must suppress inflation and won’t stop raising interest rates unless they notice a significant improvement in the forecast for inflation.
Here are the top five market-related queries.
Market attention will be focused on Lagarde’s comments because the ECB’s decision to increase its deposit rates by 50 percentage points to 2.5% is viewed as final.
Markets have reduced their forecasts for when rates will spike to around 3.3% in response to signs of decreasing inflation. Market movements have already been contested by policymakers, and if more hawkish rhetoric is used in response to a better economic outlook, expectations may rise once more to 3.5%.
Eoin Walsh, one of the partners at TwentyFour Wealth Management, said the ECB has to be hawkish.
Although Lagarde is anticipated to stress that the ECB will keep raising rates, it is unclear whether she will claim that the market price of the terminal level is too low.
The markets are hoping for this because the prognosis after Thursday is debatable. Some others favour a significant increase in March, notably Dutch and Slovak politicians. Lagarde’s comments imply that she would support the action as well.
Doves in policy are fighting back as underlying inflation declines. Fabio Panetta of Italy thinks the ECB shouldn’t commit to any specific action after February.
ING’s Brzeski claimed there have recently been inquiries as to why markets are unable to predict what the ECB would do next.
Market overconfidence is a contributing factor, but there are also concerns about the ECB’s own information problems and who is to be believed.
From March through June, the ECB intends to sell off an average of 15 billion euros worth of bonds purchased under its Asset Purchase Program (APP).
According to UBS, the ECB will confirm that the rate of QT after June will be determined at a later time, when some economists anticipate an increase.
Patrick Saner, chief of the macro strategy at the Swiss Re, stated the ECB will provide additional information on the balance sheet reduction, particularly how the various APP programmes will be handled and crucially, also on the planned unwinding of cross-country assets.
That’s unclear, and forecasting the course of inflation has proven challenging.
Lagarde will probably be questioned about the ECB’s estimate of core inflation, which excludes volatile food and energy costs, given that the new ECB projections aren’t expected to be released until March. Although the ECB aims for 2% headline inflation, authorities are more interested in a core metric.
The euro zone’s Wednesday inflation data may be timely. Although core inflation, which also excludes alcohol and cigarettes, increased from 5% to 5.2% in December, headline inflation fell to 9.2%.
Mario Centeno of the ECB believed a recession might be avoided. Business activity unexpectedly resumed small growth in January, and JPMorgan upped its first-quarter global growth prediction from a 0.5% drop to 1%, following Goldman Sachs’ lead.
Swiss Re’s Saner thought the ECB will undoubtedly acknowledge the improved domestic and international growth environment.
They can actually use this to argue that rates should increase and remain there for a long since a stronger market environment prevents the most important type of disinflation, core disinflation.