A hawkish ECB is a real possibility
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The European Central Bank (ECB) Governing Council meets this week. There will be no update to their macroeconomic forecasts but stay tuned: soaring inflation has changed the political pressure from a relaxed stance to fighting inflation. Previous commitments are no longer deemed valid.
- Rates should remain unchanged for the time being and the Governing Council should keep the sequencing: by first ending the Asset Purchase Programme (APP) and then by hiking rates.
- Sources said that during the previous meeting the board was divided, with 10 hawks calling for immediate action and 15 doves voting for status quo. The 5-year breakeven inflation rate in 5 years’ time has risen by 27bps since March 10 to 2.36%, above the ECB’s target rate. Therefore, we could witness more hawkish pressure this time.
- The APP is set to reach EUR20bn for the month of June. The Governing Council should provide some insight about its pace in the following months. Given that inflation is so high – and should stay around current levels until September, the ECB could announce that it intends to end purchases at the end of June. This would open the possibility of a rate hike as early as in July. September is however a more credible option. Governor Makhlouf said that the ECB wanted to “maintain optionality” so the governing council might want to keep all options open.
Overall, a hawkish ECB is a real possibility. Inflationary pressures are very strong, and the labor market is extremely tight, with the unemployment rate at an all-time low. The missing piece remains wages, for which recent data is unfortunately missing.
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