The ECB will need to act ‘forcefully’ with an aggressive move of 75 bps to tame inflation.

06 September 2022

At the September meeting, we expect the European Central Bank (ECB) to raise interest rates by 75 basis points (bps).

Please find below what we expect:

  • The ECB will most likely increase interest rates by 75 bps, bringing its deposit rate to 0.75%. The inflation picture has deteriorated further since the July meeting with core inflation rising to 4.3% YOY, a further broadening of underlying price pressures and slightly higher inflation expectations.  
  • We expect ECB officials to retain their meeting-by-meeting approach and refrain from explicit forward guidance on the pace of future hiking. 
  • We do not expect ECB President Lagarde to provide guidance on the level of the neutral or terminal rate.
  • We do not expect an announcement on the end of Asset Purchase Programme reinvestments, but ECB President Lagarde could indicate that discussions will start soon.
  • The ECB will most likely announce some changes to remuneration on excess liquidity given positive real rates. 
  • New ECB staff projections will likely cut ECB growth projections sharply considering the slowing momentum and the ongoing energy crisis. 2022 projections will likely remain unchanged or include small changes (Q2 growth was strong), but we expect significant revisions on 2023 projections. 
  • We expect the ECB’s inflation projections to be revised higher in 2022 (from 6.8% to 8%) and 2023 (from 3.5% to 4.5%) and then to decline close to the 2% target in 2024. 

We believe the ECB will deliver a hawkish message this week, reflecting its commitment to bring inflation back to its 2% target. At this stage, the Governing Council will in our opinion opt for a restrictive stance despite economic slowdown. It will likely push rates slightly higher and lead to a flattening of the yield curve.

Disclaimer
This commentary is intended for non-professional investors within the meaning of MiFID II. It is provided for informational and educational purposes only and is not intended to serve as a forecast, research product or investment advice and should not be construed as such. It may not constitute investment advice or an offer, invitation or recommendation to invest in particular investments or to adopt any investment strategy. Past performance is not indicative of future performance. The opinions expressed by La Française Group are based on current market conditions and are subject to change without notice. These opinions may differ from those of other investment professionals. Published by La Française AM Finance Services, head office located at 128 boulevard Raspail, 75006 Paris, France, a company regulated by the Autorité de Contrôle Prudentiel as an investment services provider, no. 18673 X, a subsidiary of La Française. La Française Asset Management was approved by the AMF under no. GP97076 on 1 July 1997.

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