The European Central Bank (ECB) is set to announce its decision on monetary policy on Thursday, July 21 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 11 major banks.
The ECB is expected to elevate its key interest rate for the first time in 11 years by 25 basis points (bps). A signal of a 50 bps increase for September is also likely. Furthermore, the central bank is expected to unveil the contours of its new anti-fragmentation backstop.
Danske Bank
“We expect ECB to go ahead with its intention to hike all three policy rates by 25 bps in July. The pace of further rate increases will depend on how the economy evolves, but we do not anticipate any guidance for the Q4 monetary policy outlook at the July meeting. As visibility remains low, we expect increased market volatility to persist in the near-term, but still see ECB as priced too aggressively by the market for 2023, especially with the Federal Reserve priced for a 50 bps rate cut in 2023. Any frontloading ECB hikes is unlikely to support EUR/USD. Designing a credible anti-fragmentation tool is key, for markets not to call the bluff on ECB and send Italian yields sharply higher again. We expect the new instrument to be implemented in a flexible manner, with focus on shorter maturities, but without a pre-set intervention amount or timeframe. We also expect purchases to be sterilized in order not to interfere with the monetary policy stance, but we see only a small probability of ECB outright selling bonds.”
Rabobank
“We expect a 25 bps rate hike, applying symmetrically to the deposit facility rate and refi rate. The Council will probably reaffirm its guidance that a bigger move in September is likely. The ECB will unveil its ‘Transmission Protection Mechanism’. We expect an open-ended instrument with light/medium conditionality and sterilisation via liquidity-draining operations. We don’t expect changes affecting the TLTRO arbitrage.”
Commerzbank
“The ECB has only very rarely signaled its intentions in advance as clearly as it has now: It will raise its key interest rates by 25 bps on Thursday, it already declared at the press conference in June. That's why we expect exactly this move, although, in view of the recent renewed increase in inflation risks, a 50 bps hike seems more appropriate to us.”
TDS
“We expect the ECB to hike rates by 25 bps. But the focus will be on the likely announcement of an anti-fragmentation tool, which needs to be big enough for markets to see as being credible. A review of other measures may also be on the table. We will be interested to see to what extent the ECB draws a line in the sand, if any, on the currency. Parity should be a magnet, and we are wary that we may see a bit of a short-squeeze in EUR if the ECB surprises with more aggressive policy. Ultimately, however, this should be short-lived and the risk of a sub-parity paradigm grows.”
SocGen
“First rate hike in 11 years (25 bps) to be announced. Anti-fragmentation mechanism to be launched, to support vulnerable countries. While downside risks to growth have increased, for now,the guidance for a possible 50 bps hike in September is likely to remain in place, partly linked to the fact that the inflation forecast will need to be revised up again in September, at least with regard to the short-term. No new staff forecasts will be presented, but an updated assessment is likely to point to high uncertainty, in particular over the energy supply situation. Risks to inflation remain to the upside, while risks to growth remain to the downside.”
Wells Fargo
“We expect the ECB to kick off its rate hike cycle at its July monetary policy meeting with a 25 bps hike to -0.25%. Eurozone inflation recently reached a new high of 8.1% YoY in May. We expect inflation to trend even higher in the coming months and possibly peak later this year, and also expect that economic growth will be sturdy enough to take on larger rate hikes. We view the possibility of a 50 bps rate increase in September as more likely than not; however, we think it is unlikely the ECB will deliver multiple 50 bps rate hikes. As such, we forecast a 25 bps hike in July, a 50 bps hike in September, and a 25 bps hike in December, bringing the policy rate to +0.50% by the end of 2022. We then expect the ECB to deliver its last rate hike of the cycle by Q1 next year, finishing with a Deposit Rate of +0.75%.”
BBH
“Despite some hawks calling for a 50 bps hike, it seems clear that the bank will opt for a more cautious move. Updated macro forecasts won’t be released until the September 8 meeting. As usual, Madame Lagarde’s press conference is likely to provide the fireworks, whether good or bad. We know that the divide between the hawks and doves remains wide. A 50 bps hike is fully priced in for the next meeting September 8, with some odds seen of a 75 bps move. Expected moves at the subsequent meetings October 27 (50 bps) and December 15 (25 bps) would see the deposit rate near 1.0% at year-end. Looking ahead, the swaps market is now pricing in 200 bps of tightening over the next 12 months which would see the deposit rate peak near 1.5%. The ECB is also expected to reveal some more details about its new anti-crisis tool. As always, we are braced for disappointment but perhaps the ECB will surprise us. As things stand, it’s very apparent that there is the usual split between the debtor and creditor nations. As a result, it seems likely that the Governing Council will be unable to agree on the trigger and conditionality for the planned anti-crisis tool.”
Deutsche Bank
“The ECB meeting will likely deliver a 25 bps hike, the first rate increase since 2011. Our updated call retains the 2% terminal rate forecast but the hiking cycle is expected to be split. The first phase has hikes of 25 bps, 50 bps, 50 bps and 25 bps in July, September, October and December. By end-2022, the deposit rate will be 1%, helping to balance inflation and growth risks before the anticipated recession forces a pause. The second phase in H1 2024 is now expected to have four 25 bps hikes and push rates into moderately above neutral territory.”
Citibank
“ECB Deposit Facility Rate – Citi Forecast -0.25%, Prior -0.5% (first hike since 2011); Main Refinancing Rate: Citi Forecast 0.25%, Prior 0.0%; Marginal Lending Rate: Citi Forecast 0.5%, Prior 0.25%. We also expect ECB to announce details of its anti-fragmentation tool. This could include no limits in time and size (subject to the 50% issuer limit, and possibly to maturities), strings attached (similar to the recovery fund), and some form of balance-sheet sterilization. The team sees a serious risk that recession, bond market turmoil or the gas crisis shortens the time window for ECB policy normalization.”
MUFG
“We are still confident that the ECB wants to bring an end to the emergency policy settings of negative rates, and will stick to plans to begin raising rates by 25 bps followed by a larger 50 bps hike in September. Logically, we think it makes more sense though to deliver a larger 50 bps hike followed by a smaller hike in September but policymakers have displayed no signs recently of changing the guidance. Beyond September, we are less convinced than the European rate market that the ECB will keep raising rates through to Q1 2023 in light of the increasing risk of a sharper slowdown. The rate market is currently pricing in 158 bps of hikes by year-end and 172 bps of hikes by March 2023. The outcome of ECB’s rate decision could be overshadowed by market participants’ response to the announcement of further details of the new anti-fragmentation policy tool. It is of crucial importance that the ECB’s plans are viewed as credible to help contain fragmentation risks. If the plans disappoint in any way for example should the new facility be viewed as too small and/or the attached conditionality is judged as too stringent then downside risks will be reinforced further for the EUR in the near-term.”
Goldman Sachs
“We expect the Governing Council to hike policy rates by 25 bps and provide additional details of its sovereign backstop. Although the sharp depreciation of the euro, recent central bank actions abroad and the chance of a further rise in survey inflation expectations suggest that a 50 bps move is possible, we believe that a quarter-point increase remains likely. This is because the Council has strongly guided towards 25 bps, the growth outlook has weakened and the ECB has historically not delivered hikes that were less than 70% discounted.”
