ECB: tough talk and puzzling projections

During the press conference following the latest governing council meeting, Christine Lagarde insisted repeatedly that moving to a 50 bp rate hike versus 75 bp previously did not represent a pivot, adding that rates still have to rise significantly and at a steady pace. Consequently, the likelihood of a terminal rate higher than 3.00% has increased, which explains the jump in bond yields. The large upward revision of the inflation projections is probably another factor behind the hawkish message. Forecasting inflation several years into the future is a difficult task, even more so in the current environment. It will be interesting to see how the governing council will strike a balance between reacting to inflation data, once they have started to decline, and focusing on the ECB’s medium-term inflation projections in setting its policy.

The latest press conference following the ECB’s governing council meeting brought tough talk. In the word cloud (chart 1), the ‘usual suspects’ again take a central position -inflation, rates, energy, etc.- but there are some notable others -will, steady, pace- that reflect the determination to send a strong message. ‘Significant’ or ‘significantly’ appear 16 times in the comments of Christine Lagarde, who also mentioned ‘steady’ 13 times. Policy rates will continue to move higher because the monetary stance needs to become sufficiently restrictive to bring inflation back to the two percent medium-term target. The repeated insistence on ‘steady pace’ of raising the policy rates can be considered as a near-term forward guidance, despite the usual insistence on a data-dependent, meeting-by-meeting approach. Having in mind what was said at last week’s press conference, one should expect further 50 basis points rate hikes at the next two meetings -2 February 2023, 16 March 2023-, whereby the latter will be particularly important, considering that new staff projections will be published on that occasion. As mentioned by the ECB president, “On the issue of interest rates, we will be looking at data. We will be data-dependent, and we will review data, particularly when we have projection meetings that are every three months or so .” Under the assumption that at the March 2023 governing council meeting, the deposit rate would be hiked to 3.00% , this meeting might see a change in language, which would become less hawkish, provided that inflation projections would have been revised downwards. Such a change would be considered by markets as a pivot, a clear change in policy orientation, whereby possible additional moves beyond 3.00% would come in smaller steps and more slowly. At the current juncture, the conditions for such a pivot are not met and on four occasions during the press conference, Christine Lagarde insisted that the ECB was not pivoting. It was a clear effort to avoid that markets would draw the wrong conclusion from moving from 75 bp increases previously to 50 bp. Undoubtedly the hawkish tone -the repeated reference to a sustained pace of tightening- serves the same purpose.

Another factor that has played an important role in the messaging is the large upward revision of the inflation projections, by 0.3 percentage points (pp) in 2022, 0.8 pp in 2023 and 1.1 pp in 2024. At first glance, there is something puzzling about the extent of the upward revision. Compared to the September projections, there are several areas of improvement: lower oil, gas and electricity price assumptions, a faster easing of supply bottlenecks, the recent appreciation of the euro, a weaker growth outlook. The impact of these factors is however dominated by “recent data surprises, a reassessment of the strength and persistence of pipeline price pressures and their pass-through, stronger wage growth and higher food commodity prices.

Download The Full Eco Flash

Share: Feed news

BNP Paribas is regulated by the FSA for the conduct of its designated investment business in the UK and is a member of the London Stock Exchange. The information and opinions contained in this report have been obtained from public sources believed to be reliable, but no representation or warranty, express or implied, is made that such information is accurate or complete and it should not be relied upon as such. This report does not constitute a prospectus or other offering document or an offer or solicitation to buy any securities or other investment. Information and opinions contained in the report are published for the assistance of recipients, but are not to be relied upon as authoritative or taken in substitution for the exercise of judgement by any recipient, they are subject to change without notice and not intended to provide the sole basis of any evaluation of the instruments discussed herein. Any reference to past performance should not be taken as an indication of future performance. No BNP Paribas Group Company accepts any liability whatsoever for any direct or consequential loss arising from any use of material contained in this report. All estimates and opinions included in this report constitute our judgements as of the date of this report. BNP Paribas and their affiliates ("collectively "BNP Paribas") may make a market in, or may, as principal or agent, buy or sell securities of the issuers mentioned in this report or derivatives thereon. BNP Paribas may have a financial interest in the issuers mentioned in this report, including a long or short position in their securities, and or options, futures or other derivative instruments based thereon. BNP Paribas, including its officers and employees may serve or have served as an officer, director or in an advisory capacity for any issuer mentioned in this report. BNP Paribas may, from time to time, solicit, perform or have performed investment banking, underwriting or other services (including acting as adviser, manager, underwriter or lender) within the last 12 months for any issuer referred to in this report. BNP Paribas, may to the extent permitted by law, have acted upon or used the information contained herein, or the research or analysis on which it was based, before its publication. BNP Paribas may receive or intend to seek compensation for investment banking services in the next three months from an issuer mentioned in this report. Any issuer mentioned in this report may have been provided with sections of this report prior to its publication in order to verify its factual accuracy. This report was produced by a BNP Paribas Group Company. This report is for the use of intended recipients and may not be reproduced (in whole or in part) or delivered or transmitted to any other person without the prior written consent of BNP Paribas. By accepting this document you agree to be bound by the foregoing limitations. Analyst Certification Each analyst responsible for the preparation of this report certifies that (i) all views expressed in this report accurately reflect the analyst's personal views about any and all of the issuers and securities named in this report, and (ii) no part of the analyst's compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed herein. United States: This report is being distributed to US persons by BNP Paribas Securities Corp., or by a subsidiary or affiliate of BNP Paribas that is not registered as a US broker-dealer, to US major institutional investors only. BNP Paribas Securities Corp., a subsidiary of BNP Paribas, is a broker-dealer registered with the Securities and Exchange Commission and is a member of the National Association of Securities Dealers, Inc. BNP Paribas Securities Corp. accepts responsibility for the content of a report prepared by another non-US affiliate only when distributed to US persons by BNP Paribas Securities Corp. United Kingdom: This report has been approved for publication in the United Kingdom by BNP Paribas London Branch, a branch of BNP Paribas whose head office is in Paris, France. BNP Paribas London Branch is regulated by the Financial Services Authority ("FSA") for the conduct of its designated investment business in the United Kingdom and is a member of the London Stock Exchange. This report is prepared for professional investors and is not intended for Private Customers in the United Kingdom as defined in FSA rules and should not be passed on to any such persons. Japan: This report is being distributed to Japanese based firms by BNP Paribas Securities (Japan) Limited, Tokyo Branch, or by a subsidiary or affiliate of BNP Paribas not registered as a financial instruments firm in Japan, to certain financial institutions permitted by regulation. BNP Paribas Securities (Japan) Limited, Tokyo Branch, a subsidiary of BNP Paribas, is a financial instruments firm registered according to the Financial Instruments and Exchange Law of Japan and a member of the Japan Securities Dealers Association. BNP Paribas Securities (Japan) Limited, Tokyo Branch accepts responsibility for the content of a report prepared by another non-Japan affiliate only when distributed to Japanese based firms by BNP Paribas Securities (Japan) Limited, Tokyo Branch. Hong Kong: This report is being distributed in Hong Kong by BNP Paribas Hong Kong Branch, a branch of BNP Paribas whose head office is in Paris, France. BNP Paribas Hong Kong Branch is regulated as a Licensed Bank by the Hong Kong Monetary Authority and is deemed as a Registered Institution by the Securities and Futures Commission for the conduct of Advising on Securities [Regulated Activity Type 4] under the Securities and Futures Ordinance Transitional Arrangements. Singapore: This report is being distributed in Singapore by BNP Paribas Singapore Branch, a branch of BNP Paribas whose head office is in Paris, France. BNP Paribas Singapore is a licensed bank regulated by the Monetary Authority of Singapore is exempted from holding the required licenses to conduct regulated activities and provide financial advisory services under the Securities and Futures Act and the Financial Advisors Act. © BNP Paribas (2011). All rights reserved.