ECB Preview: Forecasts from 12 major banks, tighter policy in response to higher inflation

The European Central Bank (ECB) will announce its decision on monetary policy on Thursday, April 14 at 11:45 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.

ECB is widely expected to leave key rates unchanged. Additionally, the central bank is set to signal tighter policy in response to higher inflation. 

TDS

“The ECB is likely to announce that its APP programme will end in May, and prepare markets for a June rate hike. An ECB pivot would anchor a possible low for EUR/USD, though a break of the 1.12 high requires settlement on the US terminal rate pricing. That said, a more active ECB is likely to reinforce the lows in EUR/CHF and would favor buying EUR/GBP dips towards 0.83.”

ING

“Staying put and continuing with the announced reduction of net asset purchases looks like the only viable option for now. However, given the latest market pricing of future ECB rate hikes and unclarity about the ECB’s exact reaction function in these times of high uncertainty, ECB President Christine Lagarde could be forced to somewhat limit the ECB’s optionality to a few options.”

Nomura

“With no new forecasts to announce, few hard data to confirm the precise extent of the impact of the war on the euro area economy, and with there being another meeting before the end of Q2 at which the ECB could make its decisions on an APP wind-down, we do not believe the ECB needs to – nor will – announce any major adjustments to its guidance at its April meeting. This is, after all, the flexibility with regard the path of monetary policy that the ECB has craved. The focus instead, we believe, will be on any nuances that ECB President Lagarde reveals in the press conference following the decision. We expect the ECB to announce, at its June meeting, an end to its asset purchases in September with the first 25bp Deposit Rate hike coming in December this year. Thereafter, we expect a further three quarter-point rate hikes to +0.50% by end-2023 – a total tightening of 100bp. We expect a cessation of ECB tightening from the end of 2023, as at that point inflation could already be in retreat, and a slowing US economy could be leading the global economic cycle downwards once again.”

Nordea

“We think the ECB will decide on the end date for net asset purchases only at the June meeting, but the decision could be taken already at this meeting. Markets continue to price in a more aggressive rate path than we think is warranted based on the ECB’s signals. ECB monetary policy account suggests the more hawkish tones within the ECB have gained the upper hand.”

Danske Bank

“We now look for a 25bp rate hike in both September and December 2022. Beyond that, we do not look for a prolonged hiking cycle into 2023 at the current stage. Yet another challenging meeting awaits this week. While the official decision is expected to be broadly unchanged, we expect Lagarde to keep the door open for a potential rate hike after summer, while she will continue to repeat the flexibility, optionality and data dependency. We believe markets will react to this, speculating about a potential rate hike in July. Upside risks to the EUR/USD on the day, but downside risks persist.” 

Commerzbank

“Due to the unclear situation, there is unlikely to be any decisions at Thursday's meeting, with one possible exception. The central bank could decide to increase the part of excess reserves that is exempt from interest at the prevailing deposit rate. Although we do not expect any decisions for Thursday's meeting apart from the tiered interest rate, the discussion on the normalisation of monetary policy is likely to continue in the Council. However, it remains uncertain whether this current increasing willingness to raise interest rates will be followed by action later in the year. After all, the willingness of many Council members is based on the expectation that the economy will continue to grow steadily despite significantly higher energy prices. However, in the event of a complete boycott of Russian energy supplies, for example, a recession would probably be unavoidable.”

Rabobank

“We expect only minor policy changes at the April meeting. Larger shifts, including a decision on APP after Q2, will be made when the ECB has new staff projections in June. Lagarde’s explanation of the new forward guidance on rates seems inconsistent with Lane's, and clarification during the Q&A session could potentially shift rate hike expectations. We expect the ECB to confirm that the TLTRO-III discount will not be extended after June. Simultaneously, we expect the tiering multiplier to increase to c. 10 times minimum reserves. Both policy rates and APP will probably be left unchanged. We expect the ECB to announce the end of net purchases in June and currently assume zero net purchases in Q3.”

Deutsche Bank

“We are not expecting much change to the ECB’s message. Instead, they think that when the new staff forecasts are available in June, they’ll announce that APP purchases will end in July, ahead of liftoff in the policy rate in September, so an underlying direction of travel that’s becoming clear. Our view is that the risks are tilted towards a more hawkish, rather than a less hawkish tone though, and as a reminder, we changed our call last week to expect a more aggressive ECB exit given the deteriorating inflation outlook, and now see the terminal rate reaching 2% by end-2023, which is 250bps higher than at present.”

SocGen

“No major changes expected but a clear communication that all options are possible, depending on the data. ECB is likely to stress the importance of anchoring inflation expectations and sound more concerned about too high inflation than the downside risks to growth. New staff forecasts will not be available, and there is not a lot of new data since the March meeting. However, the ECB should acknowledge that the data in many cases have been better than what could have been expected, while inflation again has been higher than expected. Risks to inflation are still to the upside, while risks to growth are to the downside.” 

Citibank

“Policy Rate (Deposit Facility Rate): Citi Forecast -0.5%, Prior -0.5%. Net asset purchases are set to continue at least until the end of June, rate hikes can only happen thereafter and TLTROs carry on until end-2024. However, nothing is set in stone and every meeting is live. A fixed end-date to net asset purchases, signals on pace or step-size of rate hikes could trigger a market reaction.”

Wells Fargo

“Despite a softer growth outlook, Eurozone headline inflation has moved sharply higher. Core inflation has also trended higher but to a lesser extent as it does not include volatile price components such as energy and food. But, even with core inflation slightly more modest, we still expect ECB policymakers to respond to elevated headline inflation. In that sense, we do not expect interest rate settings to change meaningfully but do expect ECB policymakers to taper asset purchases; however, we do now expect the ECB to lift interest rates 25 bps at the September 2022 meeting. We also expect steady interest rate hikes over the remainder of this year as well as into 2023.”

UOB

“We recognise that the situation remains very fluid. How the war evolves and the impact that has on energy prices will be crucial. But we are still not expecting any changes in key interest rates for now. Rather, any policy tightening by the ECB this year, will solely be in terms of ending its QE programs.”