ECB Preview: Forecasts from 12 major banks, even 75 bps is too little to lift the euro

The European Central Bank (ECB) is set to announce its decision on monetary policy on Thursday, September 8 at 12:15 GMT and as we get closer to the release time, here are the expectations as forecast by the economists and researchers of 12 major banks.

The ECB is expected to hike rates by 50 bps but markets are wagering a 75 bps rate hike amid surging energy costs. Furthermore, the bank’s staff projections are in focus, with no respite seen for the EUR.

Danske Bank

“We now expect ECB to hike 75 bps, which will be followed by 50 bps in October and 25 bps in December, but acknowledge the increased uncertainty on the two latter hike size expectations. This is +25 bps for our previous rate hike expectations at both the September and October meetings, respectively, and we now see the end-point of the ECB deposit rate at 1.5%. As regards the reinvestment schedule, we currently do not foresee that ECB will change it, but increased market and ECB focus. We believe the euro area will face a recession and ECB will hike into that, however, we also acknowledge that even without the ECB tightening, the European economy was in a severe situation to begin with a worsening energy crisis.” 

Rabobank

“The ECB is hard-pressed to demonstrate determination to achieve its price stability objective. The macroeconomic projections will show a weaker growth outlook, but the ECB is clearly willing to risk a slowdown as inflation could -again- turn out to stay higher for longer. Inflation expectations are at risk of de-anchoring, and a weak EUR adds to price pressures. Markets price roughly 67 bp of hikes currently, and the ECB cannot underdeliver if it wants to show commitment to bring inflation back to 2%. We now expect a 75 bps rate hike, but risk of 50 bps remains significant. Lagarde will stress that this is not a precursor to more 75 bps moves.”

Commerzbank

“We expect 75 bps. Admittedly, 50 bps can by no means be ruled out either; after all, many supporters of a fundamentally loose monetary policy (‘doves’) have not spoken out recently. But 75 bps is also supported by the fact that the inflation rate for August rose again and was well above expectations. However, the ECB is unlikely to raise rates by another 75 basis points after next week's meeting since they are nearing the neutral rate. Rather, we expect 50 basis points for the October meeting and 25 basis points each for December and February 2023. At the beginning of 2023, the deposit rate would be 1.75%.”

Nordea

“We now see the ECB delivering a 75 bps hike and the bank is most likely to hike at a similar speed in October.”

TDS

“This decision is balanced on a knife's edge between 50 bps and 75 bps. We opt for the more cautious 50 bps hike on the back of recent Lane comments, but neither outcome would surprise us. A 50 or 75bp hike probably won't do many favours for the EUR, given the importance of the terms of trade shock, growth, and global risk sentiment. A more forceful ECB could limit the downside, especially if the energy shocks ease a bit. Yet, we still like selling EUR/USD rallies ahead of 1.02, aiming for a test of 0.98 in the near future.”

SocGen

“Until recently, we would not have believed in an outsized 75 bps ECB hike given the risks to the growth outlook, even though we think the ECB has reacted too slowly so far. However, with high inflation now lingering for longer, risking a more problematic wage-price spiral, and, importantly, with markets pricing in close to a 75 bps hike, the focus is rather on the risks of not raising by 75 bps, with the currency impact an important aspect. We thus think there is an urgency to reach a more neutral policy stance. Given the threat to the ECB’s credibility, we also wonder why quantitative tightening (QT) is not discussed. As we argued in the past, not using QT should imply higher rate hikes. The greatest risk of raising rates by 75 bps now is that the ECB may need to trigger the TPI soon. This, along with an uncertain growth outlook and a low neutral rate (1%), will be stressed by the doves who might put up more of a fight than in July (also as there is no TPI to compromise on). We expect rate hikes of 75 bps, 50 bps and 25 bps in the forthcoming meetings this year, taking the deposit rate into neutral territory as the economy slows, and another three 25 bps hikes next year. With high uncertainty over how effective rate hikes will be in a landscape of high excess liquidity, QT will need to be considered soon, unless a deeper slowdown in activity intervenes.”

ING

“We expect the ECB to ‘only’ hike by 50 bps. This would be a compromise, keeping the door open for further rate hikes. A 75 bps rise looks like one bridge too far for the doves but cannot be excluded. Further down the road, we can see the ECB hiking again at the October meeting but have difficulties seeing the ECB continue hiking when the eurozone economy is hit by a winter recession. Hiking into a recession is one thing, hiking throughout a recession is another.”

Nomura

“We now expect a 75 bps increase in policy rates. Continued upside surprises to price data since the last meeting, markedly elevated core and supercore inflation, as well as continued concerns over a de-anchoring of inflation expectations, will force the hand of the ECB Governing Council to tighten more aggressively in the near term. We have made other adjustments to our forecast profile and now see 50 bps hikes in both October and December, 2% peak rates by February, and cuts from September 2023.”

ANZ

“We think inflation trends and disparities merit a 75 bps hike. EUR weakness is a problem. The ECB’s task is greatly complicated by uncertainty over Russian gas supplies. Moscow’s decision not to re-start gas flows via the Nord Stream pipeline raises downside growth risks while increasing the inflation outlook. The ECB must prioritise its price stability mandate amid unprecedented uncertainty. Decisive monetary normalisation is a sensible strategy as containing inflation is central to euro area (EA) economic stability. We have raised our terminal deposit facility forecast 50 bps to 2.0%.”

Citibank

“Besides the size of the 2nd hike (we expect 50 bps), the focus will be on the prospects for the terminal rate, APP reinvestments as well as the remuneration of deposits. ECB staff projections could matter if they show above-target inflation in 2024 or deep recession.”

BMO

“We now expect the ECB to raise rates by 75 bps. How the euro reacts will be watched carefully. The ECB may not target the exchange rate, but having a weak euro also contributes to higher inflation. The sustainability of the euro’s strength will depend more heavily on 1) the general USD tone, 2) credit market conditions, and 3) energy price developments.”

ABN Amro

“We expect the ECB to raise its policy rates by 75 bps. The larger expected hike reflects: 1. The hawkish comments from the majority of Governing Council officials over the last few days 2. Headline inflation has continued to accelerate, while the drivers of price pressures have generally been more elevated than the ECB expected in June. For instance, the euro has weakened further 3. GDP in the first half of this year has come in higher than the central bank expected 4. The shift in market pricing and analyst forecasts means that a larger move would not be a shock (even though such a move is not fully priced).”