Daily Management Review

ECB To Raise Interest Rates By 50 Basis Points In The Hope That Inflation Has Peaked


ECB To Raise Interest Rates By 50 Basis Points In The Hope That Inflation Has Peaked
With inflation anticipated to be near to a peak and the Frankfurt institution looking to reduce its massive holdings of government bonds, the European Central Bank will continue to raise benchmark rates, albeit at a slower pace.
“We expect the ECB to raise its policy rates by 50 bp at the December meeting,” said Michael Schumacher, an ECB watcher with Natixis, in a recent research note.
“We also expect an announcement of Quantitative Tightening next year, though the ECB is unlikely to provide a specific start date at this point.”
Quantitative tightening, or QT, could see the European Central Bank reduce its massive bond portfolio on its balance sheet after years of government debt purchases and monetary stimulus.
“The governors meeting should be an opportunity to discuss the reduction of the balance sheet,” Franck Dixmier, a global CIO for fixed income at Allianz Global Investors, said in a note.
“We expect the ECB to take a very gradual approach to avoid market volatility shocks as the Governor of the Banque de France, Francois Villeroy de Galhau, recently stressed.”
Inflation and possible peak inflation will be another hot topic for the ECB's Governing Council, which concludes its meeting Thursday with a press conference.
“While Inflation likely peaked in October, we see core inflation lingering above 5% until mid 2023 before trending lower,” said Anatoli Annenkov at Societe Generale in a recent research note.
And, despite recent criticism about the reliability of the forecasting models used for them, the staff projections will receive a lot of attention. The ECB's inflation forecast for 2023 is widely expected to be revised upward, while GDP estimates for next year are expected to be revised downward.
“It will be particularly interesting to see whether the ECB will have a technical recession in its baseline forecast,” Annenkov added.