By Dhara Ranasinghe, Naomi Rovnick and Stefano Rebaudo
LONDON (Reuters) – The European Central Bank meets next Thursday and appears set to slow the pace of aggressive rate of interest hikes as inflationary pressures finally show signs of abating.
It has raised rates by a complete 200 basis points (bps) since July, its fastest pace on record, to contain red hot inflation.
A slowdown within the pace of rate increases could also be coming, however the ECB is removed from done and markets wish to get a way of where the important thing 1.5% deposit rate will find yourself.
“They (policymakers) will keep sounding hawkish and aggressive as they need inflation expectations to stay anchored,” said Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management.
Listed below are five key questions on the radar for markets.
1/ What’s going to the ECB do on Thursday?
Markets anticipate a 50 basis point rate hike after two straight 75 bps increases, slowing the pace of tightening.
However the ECB is prone to stay hawkish and investors will even search for clues on where the deposit rate goes.
Money market pricing suggests rates will peak in June 2023 at around 2.7%, but some reckon the speed will find yourself higher because underlying price pressures remain strong and expansionary fiscal policy may boost inflation.
Deutsche Bank economists see the terminal rate at 3%, with risks skewed to the upside.
“We must accept that the long run rate path is a discovery process for markets and central banks,” said Francis Yared, global head of rates research at Deutsche Bank.
Will the ECB decelerate? https://www.reuters.com/graphics/EUROZONE-MARKETS/ECB/mopaknxbjpa/chart.png
2/ Is euro zone inflation peaking?
Headline inflation slowed in November for the primary time in 1-1/2 years, to 10%, raising hopes that sky-high price growth has passed.
Yet inflation stays above its 2% goal. ECB President Christine Lagarde will likely watch out about calling a peak after last yr’s “big mistake” of insisting surging prices were “transitory,” said Pictet’s Ducrozet.
Excluding food, fuel, alcohol and tobacco, inflation is at 5% and pipeline pressures remain abundant. ECB Chief Economist Philip Lane reckons wages could be a “primary driver” of price inflation even after energy price shocks fade.
Euro zone inflation off record highs https://www.reuters.com/graphics/EUROZONE-MARKETS/ECB/myvmoommdvr/chart.png
3/ Will the ECB discuss QT?
Probably. Methods to run down the bonds held on its balance sheet in what’s often called quantitative tightening (QT) is a key a part of the ECB’s policy debate.
The ECB may offer some guidance on how QT will apply to its 3.3 trillion euro Asset Purchase Programme and is prone to be pressed for details.
“A start in February with partial reinvestment just like what the Fed does is probably,” said Patrick Saner, head of macro strategy at Swiss Re.
Lively bond sales were expected to be ruled out for now.
QT is coming https://tmsnrt.rs/3VIgGN2
4/ Does the ECB think a recession will probably be shallow?
Closely-watched business activity data points to a gentle recession and latest forecasts should show how the ECB views the approaching slowdown.
In September, it forecast 0.9% euro area growth in 2023, a major downgrade from its June prediction.
UBS’s chief European economist Reinhard Cluse expects the ECB to cut back its outlook to 0.5% growth for next yr, with “the assessment that we’re clearly slowing down and two quarters of negative growth might well occur, but a deep recession (is) unlikely to be their core scenario.”
Global economic activity flashes red https://www.reuters.com/graphics/EUROZONE-MARKETS/ECB/movakkmnnva/chart.png
5/ ECB policymakers are divided over the outlook, what does that mean?
Lane and Isabel Schnabel, who lead the economic debate on the ECB board, have given contrasting views recently.
Lane believes record price growth will begin to subside next yr. Schnabel argues that the longer inflation is allowed to stay high, the greater the chance that it takes root.
Lagarde could possibly be pressed on how she views the sparring between top officials. A compromise could possibly be the consequence.
“With the doves being vocal again, we’re looking right into a period where hawks is not going to be the one ones attempting to drive the monetary policy, which suggests that we are going to see larger compromises,” said Danske Bank chief analyst Piet Haines Christiansen.
ECB’s top economic thinkers spar over outlook https://www.reuters.com/graphics/EUROZONE-MARKETS/ECB/gkvlwgrwdpb/chart.png
(Reporting by Dhara Ranasinghe and Naomi Rovnick in London and Stefano Rebaudo in Milan; Graphics by Vineet Sachdev, Kripa Jayaram, Sumanta Sen, Riddhima Talwani and Vincent Flasseur; Editing by Catherine Evans)
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