ECB Preview: Forecasts from 12 major banks, under pressure to explain its stance on inflation

The European Central Bank (ECB) will announce its decision on monetary policy on Thursday, February 3 at 12:45 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.

The ECB is widely expected to keep its policy settings unchanged but ECB President Christine Lagarde's comments on the inflation outlook will be watched closely by market participants. 

SocGen

“The first meeting of the year will offer a chance to reflect on both the past year and challenges ahead, although the potential impact of escalating tensions between Russia and Ukraine will no doubt need to be discussed. If tensions deepen, resulting in disruptions in energy supply to Europe, we expect the ECB to turn increasingly dovish, focusing on the impact on growth and financial stability, despite likely higher energy inflation in the short term. These concerns aside, the ECB has rapidly gone from being happily behind the curve to genuinely concerned about the persistency of high inflation. Such concerns are unlikely to dissipate rapidly, with upside risks also dominating in the medium-term. For now, we think the ECB will stick to its strategy, and only tighten further once signs of wage acceleration emerge.”

Nordea

“The ECB meeting should not lead to any major changes in the monetary policy outlook. The ECB has been keen to time the bigger reviews in its monetary policy with the quarterly staff forecasts lately, and especially as the central bank provided a rather clear path forward at the December meeting, big changes to that course would be a big surprise. We expect Lagarde’s general tone to be rather slightly dovish than hawkish, while the more hawkish tones may again be represented more in the monetary policy account. However, while Lagarde will likely continue to talk down the possibility of rate hikes this year, she is unlikely to give similar guidance into 2023, which will leave room for more aggressive Fed pricing to spill over to the euroarea.”

ING

“We don’t expect the central bank to give any hints on possible rate hikes. It is highly unlikely that we'll see any new policy announcements. However, the ECB will have to steer market expectations cautiously. The Bank will have to confirm its new hawkishness without sounding too hawkish. If market expectations surge too quickly, higher interest rates could undermine the economic recovery. On the other hand, too much dovishness could damage the ECB’s credibility as an inflation fighter. This is why the ECB needs to avoid rushing from 'inflation patience' to 'inflation panic'. How could they do it? Confirm the December decisions, keep the door open for faster asset purchase reductions and stress the sequencing of policy rate hikes only after the end of asset purchases.”

Nomura

“We expect the ECB’s meeting to make no major changes to policy or guidance. We continue to think that the ECB will be in a position by the end of this year to ready the markets for the end of the APP in early 2023 and, shortly afterwards (June 2023), we expect the beginning of a slow normalisation of policy rates. We think the risks are on the upside to our rate view – namely for an earlier (end-2022/early-2023) and faster (25bp, rather than 10bp) per quarter depo rate tightening.”

Rabobank

“We expect the ECB to stick to its script of transitory inflation, which means that 2022 should only see a reversal of pandemic-related tools and not a broader withdrawal of monetary accommodation aimed at achieving the inflation goal. In fact, even our alternative scenario sees a 2022 lift-off as quite unlikely. Nonetheless, money markets continue to price a first-rate hike before year-end.” 

Danske Bank

“While we do not expect the meeting to bring significant new signals to the market, attention to the elevated inflation and even more data dependence, as well as the difference to Fed, will be in focus. We expect the ECB to convey a robust, yet slowing, economic outlook and an elevated uncertainty on the inflation outlook with a confirmation of inflation expected to settle below the 2% target towards the end of the year and in 2023 and 2024. We expect attention to the recent rise in real rates, but given the absolute level of the metric, we do not believe this would give cause for concern at the ECB. We do not see the ECB giving indications to follow the other major central banks in their tightening cycle. To us, it would be a surprise if the ECB were to announce new TLTRO rounds. We continue to expect the tiering multiplier to be increased to 12 later in the year (most likely in June). From a near-term market reaction perspective, we remain unconvinced whether markets will buy into the ECB's wait-and-see stance and keep the very aggressive front end pricing for Dec-22.” 

TDS

“We expect no material change to ECB messaging at this meeting, with policy largely set in stone until October. With the ECB on auto-pilot this month, we anticipate USD direction will likely reinforce EUR downside, aiming for a dip below 1.10 in EUR/USD.”

BBH

“We expect ECB President Lagarde to push back hard against market tightening expectations. The bank is likely to affirm the end to PEPP in March, which was announced at its last meeting on December 16.  Updated macro forecasts won’t be released until the March 16 meeting. The eurozone economy is clearly slowing and faces many headwinds this year so tighter policy is the last thing needed.  ECB liftoff talk is premature and we think this is a 2023 story. The most recent Bloomberg poll suggests the same, with most respondents looking for liftoff in September 2023. However, the swaps market is pricing in 25 bp of tightening this year, which we view as highly unlikely.” 

Deutsche Bank

“We are now expecting a policy rate liftoff in December 2022 of 25bps. We’re also anticipating a faster pace of tightening, with 25bp hikes in the deposit rate per quarter from December 2022, until rates reach +0.5% in September 2023. In terms of what it means for this February meeting, we expect the slow, step-by-step pivot to exit will continue. Our view is that President Lagarde will reiterate the ECB’s capacity to act once the inflation criteria in the rates guidance are met, whilst at the same time differentiating the needs of the Euro Area from the US.”

ANZ

“We expect the ECB will acknowledge upside inflation risks while re-emphasising its commitment to providing support via favourable financing conditions. On balance, though, we think it will push back on expectations of an early rate hike and stress the need to observe secondary effects. Our expectation now is that QE will end in Q4 this year and rate rises will begin in the middle of 2023.”

Citibank

“The December decision to extend asset purchases at least until Sep’ 22 will keep the Governing Council on hold. But high and rising inflation will likely keep rate setters on their toes. Guidance is unlikely to change, but the balance of risks can potentially appear biased towards a more hawkish message.”

UBS

“The ECB has become more hawkish, but we still expect it to proceed with caution at its upcoming meeting. Following the taper announcement in December, policymakers are likely to bring bond-buying to an end early in 2023. After this, we look for rate hikes in increments of 10 basis points once a quarter beginning in June 2023. This means the region’s equity markets remain well supported.”