Five questions for the ECB ahead of Thursday’s meeting
By Dhara Ranasinghe and Stefano Rebaudo
LONDON (Reuters) – The European Central Bank (ECB) is expected to favor another sharp hike in interest rates on Thursday to curb inflation, but what it decides to do next appears more uncertain.
As part of the World Economic Forum held in Davos, ECB President Christine Lagarde stressed the need for monetary policy to “stay on course”.
“ECB officials believe they need to kill inflation and will only stop raising interest rates when they see a significant improvement in the inflation outlook,” said Carsten Brzeski, ING’s global head of macroeconomics.
For investors, Thursday’s session raises five key questions:
1/ What will the ECB decide?
There is little doubt for observers that the ECB will raise its deposit rate by another half point to 2.50% on Thursday. Christine Lagarde’s press conference at 13:45 GMT was the center of attention.
Signs of slowing inflation prompted markets to cut expectations that rates could peak to 3.3%. ECB officials have already questioned market guidance, and rate expectations could rise to 3.5% if a brighter economic outlook encourages more restrictive messaging.
“The ECB should be hawkish,” said Eoin Walsh at TwentyFour Asset Management. “I don’t know if (Christine) Lagarde will say the market rate is too low, but I expect her to reiterate that the ECB will continue to raise rates.”
2/ Will the ECB provide indicators for March and beyond?
Markets hope so, as the outlook beyond the February 2 meeting is very uncertain. Some members of the committee, including the heads of the central banks of the Netherlands and Slovakia, are in favor of a sharp increase in the discount rate in March.
The members, who are among the most “dove” of the institution, oppose it, considering the moderation of global inflation. Fabio Panetta, a member of the ECB’s executive board, believes that the central bank should not commit to concrete measures after February.
“Recently there have been questions about why the markets don’t understand what the ECB will do next,” said Carsten Brzeski at ING. “Part of the explanation is that the markets are too optimistic, but it’s also because of the ECB’s chaotic communication and who we listen to.”
3/ Will the ECB talk about “quantitative tightening”?
The ECB plans to reduce its bond portfolio, accumulated in recent years, by an average of 15 billion euros per month from March to June under the APP purchase program. UBS expects the bank to confirm the pace of this “quantitative tightening” beyond June to be decided later, as other economists expect the process to accelerate.
Patrick Saner, Swiss Re’s head of macroeconomic strategy, said: “The ECB will provide further guidance on how to manage the various APP programs and, most importantly, on the balance sheet, including the planned unwinding of assets across countries.”
4/ How fast is core inflation likely to fall?
As updated ECB forecasts are not expected before March, Christine Lagarde will likely be asked about the ECB’s view on the evolution of core inflation.
January inflation figures for the euro zone, which will be released the day before the ECB meeting, could be on time.
According to the Reuters consensus, consumer prices in the 20 countries of the monetary bloc are expected to increase by 9.1% after +9.2%, and the inflation rate, excluding energy and unprocessed food products, will be 6.9%, as previously negative.
5/ Is the ECB more optimistic about growth prospects?
The governor of the Portuguese central bank, Mario Centeno, believes that recession can be avoided. Private sector activity rose unexpectedly in January, according to early PMI results for the euro zone, and JPMorgan raised its growth forecast, as did Goldman Sachs. The US bank expects growth of 1% in the first quarter, compared with a previous decline of 0.5%.
“Yes, the ECB will certainly recognize an improving domestic and external growth environment,” said Swiss Re’s Patrick Saner.
“In fact, it would also allow him to argue that rates should go up and stay there for a while because a stronger demand environment prevents core inflation from falling, which is the most important thing.”
(Dhara Ranasinghe and Stefano Rebaudo in Milan; graphics by Vincent Flasseur and Kripa Jayaram, French version by Laetitia Volga, editing by Blandine Hénault)