ECB Preview: Forecasts from eight major banks, ready for lift-off

The European Central Bank (ECB) will announce its decision on monetary policy on Thursday, June 9 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 eight major banks.

The ECB is set to announce the end of its QE program and keep key rates unchanged while hinting at a July lift-off. In the opinion of FXStreet’s Yohay Elam, the ECB will most likely opt for what it already signaled – a 25 bps hike in July.  

SocGen

“The June ECB meeting should align with the views we’ve heard over the past month, signalling an end to net APP purchases by early July (or end June) and a rate hike in July. We wonder though: if there was sufficient conviction to signal rate hikes already in early May, why not end QE and raise rates in June? With inflation expectations above 2.2% since early March and market rate expectations well-ahead, why the foot-dragging? Clearly, forward guidance is a difficult habit to shake, reflecting fears of adverse market reactions, but it now seems to be a hindrance to data-dependency and timely action. With the PMIs holding up well in May and inflation next week expected to break new records (7.9%), the outlook may soon demand more action. A discussion on 50 bp hikes and QT, for which there is a clear need for early signalling, seems all but premature. The risk of lasting indirect and second-round inflation effects is now so high that it threatens to de-anchor inflation expectations and the ECB’s credibility. This holds true even if growth turns out weaker than expected over the coming quarters. Allowing a gradual reduction in the APP reinvestments could thus help anchor expectations and reduce the need for steeper rate hikes. We expect little help from the upcoming bank TLTRO repayments (around €200bn in June and €450bn over the coming year) and believe a new (limited) TLTRO will be needed in 2023 to smoothen the run-down. A too reactive ECB thus risks higher inflation expectations and more aggressive rate hikes later.”

Deutsche Bank

“Our previous baseline was to expect back-to-back 25 bp hikes from July. We now expect one of the two hikes in Q3 to be a 50 bp hike – September is more likely than July. Hikes of 25 bp in July and 50 bp in September mean the deposit rate will rise above zero in three months. We believe the ECB is continuing to underestimate inflation and we expect support for a 50 bp hike will increase as the summer progresses. On 9 June, we expect the ECB to confirm that APP net purchases will cease at the end of June. Other issues: (1) staff forecasts: inflation to rise to 2% in 2024, satisfying the liftoff criteria; (2) rates guidance: expect the three liftoff conditions to be replaced with language similar to Lagarde's normalisation blog; and (3) TLTRO: expiry of TLTRO discount to be confirmed and ECB to pledge smooth transmission of the hiking cycle through the banking system.”

Nordea

“The ECB is set to confirm that it plans to end asset purchases very early in July and hike rates by 25 bp later that month. While the door is not totally shut for a 50 bp move in July, it would be quite surprising for the ECB to start its hiking cycle with such a big step, especially as Lagarde recently signalled the ECB’s first moves would take place gradually. Given the ECB’s gradual shift towards a more hawkish stance and the market’s receptiveness to such comments, we see risks tilted towards a hawkish interpretation of the ECB’s message, i.e. higher rates and a stronger EUR. The ECB staff forecasts are set to show clear downward revisions to GDP growth but see core inflation above the target also longer out.”

TDS

“We expect the ECB to announce that the APP will end within weeks, and send a strong signal that rate hikes are coming in July and September. Forecasts will show stronger inflation and weaker growth, highlighting the ECB's challenge going forward. With the Euribor curve already reflecting the ECB's most likely scenario for tightening, scope for EUR/USD gains remain limited from here.”

Danske Bank

“This ECB meeting is set to be the formal end of ECB net asset purchases and a clear signal to hike rates in July, although without specific guidance of the size of the first-rate hike. We expect ECB net purchases to end on 1 July, thereby in line with previous guidance for Q3. With inflation pressures continuing to build and the economic backdrop still supported by services, we do not expect the inflation problem to solve itself in the near future. On the other hand, inflation expectations should gradually decline to the 2% mark in late 2024/early 2025, which leaves a narrow window for ECB to hike between now and the coming 12M. Market focus will be on the discussion if a 50 bp hike is possible, and if so when, as well as any hints about tools that ECB may take to address fragmentation. We expect ECB to hike 25 bp each meeting until Mar23, but risks are clearly skewed for a 50 bp rate hike in H2 this year (July or Sep most likely).”

Commerzbank

“The ECB Council is expected to decide to end its net asset purchases at the beginning of the third quarter. We also expect it to signal the end of the negative deposit rate by September.”

Rabobank

“A further deterioration of the inflation outlook warrants immediate action, while recent data on the economy remain solid enough to facilitate some tightening. Inflation data have increased the odds of a 50 bp hike. We believe it is unlikely to become the ECB’s base case already, but we would not want to position against this risk. If the ECB does go for a 50 bp hike, we prefer July over September or later. We expect the ECB to terminate APP this month, with zero net purchases from July. Sequencing prevents hiking policy rates this month, but July is all but a done deal. We expect the ECB to confirm that the TLTRO-III discount will not be extended after June. The ECB is not in a hurry to drain liquidity from the system.”

BofA

“We expect the ECB to leave the door open to 50 bp in July and September by signalling that negative rates will end during the third quarter (rather than at the end of the third quarter). We have recently changed our ECB call and now expect a total of 150 bp throughout 2022. For now, while we reassess our growth forecast and wait for this week's meeting, we think they are likely to be stopped out in 2023. Being forced by persistent inflation surprises, we expect the ECB to begin its hawkish pivot with the end of QE this week and the first hike, possibly by 50 bp, in July. We expect this pivot to start supporting the EUR, but we are also cautious as a number of things still weigh on the currency. Assuming our call turns out right, any EUR strength should be temporary.”