ECB Preview: Forecasts from 16 major banks, a hawkish surprise?

The European Central Bank (ECB) is set to announce its decision on monetary policy on Thursday, December 15 at 13:15 GMT and as we get closer to the release time, here are the expectations as forecast by the economists and researchers of 16 major banks.

Markets expect the ECB to moderate its pace of rate hikes to 50 basis points (bps) after two consecutive 75 bps hikes. 

Nordea

“We think the ECB will decide to raise rates by 75 bps for the third time in a row, in a nod to the more hawkish voices in the Governing Council, postpone the decision on the starting date for reducing the huge bond holdings, or set the date for late Q2 or early Q3 2023, in a nod to the more dovish voices in the Governing Council, set the broad guidelines for the reduction in bond holdings, or quantitative tightening (QT), including setting cap values for the amount of bonds allowed to mature each month, with the monthly cap initially set at EUR10 to 20bn per month, signal that while the central bank remains in a data-dependent mode, further hikes look likely and their magnitude is likely to moderate going forward.”

Rabobank

“A 50 bps rate hike seems more likely at this juncture, although we would not fully discount the possibility of a ‘surprise’ 75. We maintain our forecast of a 3% terminal rate. As such, we have extended our policy expectations with a final 25 bps hike in April. We could see quantitative tightening run at a monthly pace of EUR25-30bn, and we have pencilled in a Q2 start date.”

Danske Bank

“We expect the ECB to deliver a 50 bps rate hike with a hawkish twist. Specifically, we expect the ECB to present key principles of the end to reinvestments under the APP process (in which reinvestments will almost come to a full stop) and an open-ended wording for more rate hikes to come. This will be a compromise, which we believe will be palatable to both hawks and doves. We expect the hawks to use the easing of financial conditions in the past weeks to argue for a more aggressive calibration, as the textbook would say that the current ECB stance is not particularly restrictive. The European economy fared surprisingly well in Q3, but we expect the ECB to have a mild recession in its baseline staff projections. For inflation, we expect the new staff projections to only point to headline inflation at the 2% target in 2025. We currently expect ECB rate hikes into Q1 next year, with the deposit rate peaking at 2.75%, but with risks skewed for more hikes.”

SocGen

“We expect that the hawks will settle for hiking rates by a reduced amount of 50 bps, but 75 bps remains a possibility. We also look for clearer language that the policy stance will need to become restrictive, as the (core) inflation forecasts are again revised up and the risk to inflation remains to the upside. For the policy stance to be restrictive, we believe the balance sheet will be reduced by more than what the TLTRO repayments can achieve early next year. Still, the ECB may need some more time to steer clear of high issuance at the start of next year and to assess the TLTRO repayments, before launching a timid QT, hoping for as little market attention as possible. Such a cautious approach constitutes an upside risk to the terminal rate and/or inflation. It will also be important to understand where the ECB sees the balance sheet in the medium term and if there are views that liquidity needs now are higher than in the past.” 

Commerzbank

“The ECB is unlikely to decide on another jumbo rate step of 75 bps but instead opt for 50 bps. This is supported by quite a few statements by members of the ECB Council. The ECB's updated inflation projections also argue for a slower pace of rate hikes. Although it is likely to adjust its short-term projection up again, we expect the projections for headline inflation to remain virtually unchanged in the medium term; the 2025 forecast published for the first time is even likely to be below 2%. The ECB is unlikely to raise its inflation projections because future prices for natural gas (which the bank uses as a technical assumption) have fallen massively since the September projection.”

TDS

“We expect 50 bps hikes across all key interest rates, taking the depo rate to 2.00% at this meeting. A third consecutive 75 bps hike, however, can't be completely ruled out, though we put the odds close to 25% at this stage. Broad QT guidance is likely to be announced as the ECB starts to shift strategy. Our broad expectation is that QT will occur at a pace of roughly EUR150 bn/year, and start sometime by the middle of 2023.”

ING

“We think that the risk of a 75 bps rate hike meeting has clearly increased. Next to the rate hike, the ECB is likely to set out some general principles of how it plans to reduce its bond holdings. We expect the ECB to eventually reduce its reinvestments of bond purchases but to refrain from outright selling of bonds. In any case, next week’s ECB meeting could send us back in time as we witness policymakers still trying to break a wave – a wave of inflation and with it, a wave of speculation around a pivot in monetary policy. What the Bank won't break, is the wave of jumbo rate hikes.”

ANZ

“The ECB’s focus on getting inflation back on a sustainable track towards target will require restrictive policy rates. Given the economic risks that restrictive policy rates bring, we anticipate the central bank will scale back the magnitude of rate rises and favour a 50 bps rather than 75 bps hike this month. For all aspects of monetary policy to be consistent, we expect the ECB will also outline its QT strategy. We think this will be passive and centred on reducing the Eurosystem’s Asset Purchase Programme (APP) rather than reducing the size of the Pandemic Emergency Purchase Programme (PEPP).”

Deutsche Bank

“We are calling for a 50 bps hike and a hawkish communications strategy but do not rule out one more 75 bps hike before the downshift happens. They expect the decision and messaging to be in line with their expectations of a 3% terminal rate, with no rate cuts before the middle of 2024 and c.20% balance sheet contraction by the end of next year, mainly via TLTRO repayments.”

BMO

“It is a tough call, but we see the ECB raising the three key interest rates by 50 bps, a step down from the two consecutive 75 bps rate hikes but bringing the refi rate to 2.50%, the marginal lending facility to 2.75%, and the deposit facility to 2.00%, all 14-year highs. The discussion, however, should not be described as one between hawks and doves; rather, it is between those who are hawkish and those who are even more hawkish. The entire Governing Council agrees that near-record high inflation is their primary problem, but they disagree on how aggressive rate hikes need to be. So, expect hawkish commentary to accompany a 50 bps hike, which will be made at the same time as the EU energy ministers summit.”

Citibank

“We expect the ECB to hike rates by 50 bps, taking the deposit facility rate to 2.00% with the accompanying message that rate hikes will continue till inflation dynamics have convincingly turned. We also expect a decision in principle to start QT in H1’23. Expectations remain for a start in April following a decision at the March meeting, and at a slow pace. We also expect the ECB to follow other forecasters and revise up the HICP inflation profile materially, at least in the near-term.”

Wells Fargo

“For December, we anticipate a step down in the pace of rate hikes, and forecast the ECB to raise its Deposit Rate by 50 bps to 2.00%. The other topic that will likely be discussed is the reduction in the ECB's balance sheet size, or quantitative tightening. Here, we expect ECB policymakers to make an ‘in principle’ decision to proceed with quantitative tightening early next year; however, confirmation and implementation of that decision may not occur until March 2023. Specifically, from March next year we expect the ECB to allow for a passive reduction in holdings under the Asset Purchase Program by allowing bonds to roll off as they mature.”

MUFG

“We expect a 50 bps hike to 2.00% with guidance consistent with further rates hikes in Q1 next year. But that guidance should also provide some hints on the potential for slowing the pace further. We expect two 25 bps rate hikes in Q1 taking the key policy rate to 2.50% – the level at which we expect the ECB to pause.” 

Swedbank

“The Governing Council will increase all base interest rates by 50 bps this Thursday, this will be followed by two more hikes of 25 bps in February and March. Recently we have seen more pronounced divisions of opinion between the hawks and the doves at the ECB. We think that interest rates will peak at a lower level than the current market consensus. However, to appease the hawks the Governing Council is likely to start QT as soon as next month – maturing bonds will be rolled off, but with a cap of EUR20 billion per month. Simultaneous QT and interest-rate increases are a dangerous policy mix in a fragile and indebted euro area, which isn’t out of the energy crisis yet. In all likelihood, monetary tightening will prove to be excessive and will lead to the quick reversal at the end of 2023.”

RBC Economics

“We look for a 50 bps hike by the ECB in December, lifting the deposit rate to 2% which we think is close to neutral. We expect rate hikes to continue at a slower pace in the first quarter of 2023 before the ECB hits pause after its March meeting. The central bank is already shrinking its balance sheet through TLTRO redemptions, and we expect it will add to that by beginning to reduce its APP holdings next spring, shortly after its final rate hike. We should get details from the ECB at its upcoming meeting but at this stage expect passive QT by limiting reinvestment rather than outright asset sales.”

OCBC

“We expect the ECB to moderate its pace of rate hike to 50 bps, following two straight 75 bps hikes in September and October, which will bring its deposit facility rate to 2.00%.”