...The European Central Bank will hike its benchmark deposit rate by 75 basis points, from 0.75% to 1.50%, when the Governing Council convenes again in Frankfurt next Thursday, October 27 for its monetary policy meeting.
With so many officials having already come out in force to express their strong preference for another 75bp hike, it would indeed, as one official quipped, be truly bizarre if the ECB was not to hike by 75 bps next week...
...Eyeing the Next Two Meetings
The near-term, broad policy consensus among ECB officials beyond the October meeting remains as we laid out in detail in SGH 9/29/22, “ECB: Staying the Course.” If anything, these expectations have been reinforced since by ECB and Eurosystem officials in speeches, and most notably in detail by Banque de France Governor Francois Villeroy de Galhau.
The December 15 meeting will entail a debate between another 75bp hike to 2.25% or a 50bp hike to 2%.
Many officials are leaning to a modest step down in pace from the 75s, to 50, including Villeroy, and we believe it would be fair to say this is a rough, if not rather loosely held, consensus at this time.
But there are many officials also already leaning towards another 75bp in December, and it seems a reasonable bet to us that the continued poor inflation data going into the turn of the year, with core pressures remaining high even if headline stabilizes, will keep our (and the market’s) lean towards 75.
With the usual caveat of considerable uncertainty around the turn of the year, energy prices, growth concerns, and most importantly a true sense of the underlying dynamics behind core inflationary pressures, the strategy as we also laid out in the Sep 29 report is to then decelerate the pace of rate hikes once the ECB gets above a 2% handle, perhaps to 25s (if they can get away with that), as the ECB starts the process of shrinking its balance sheet...
...As to timing, some financial wire services predict that the balance sheet reduction will not start until March 2023, but we believe this is off the mark.
We expect the ECB will know by its February 3 meeting, the first meeting of 2023, what it intends to do, decide, and announce the details at that meeting. With a massive balance sheet clearly working at odds to monetary policy objectives, the ECB will then start the gradual reduction process in the same month — February...
The following is a reformatted version of the introductory remarks of European Central Bank President Christine Lagarde at a press briefing on Thursday:
“Good afternoon, the Vice-President and I welcome you to our press conference.
The Governing Council today decided to raise the three key ECB interest rates by 75 basis points. With this third major policy rate increase in a row, we have made substantial progress in withdrawing monetary policy accommodation. We took today’s decision, and expect to raise interest rates further, to ensure the timely return of inflation to our two per cent medium-term inflation target.
European equities erased earlier losses as the region’s central bank raised interest rates while its statement was seen as less hawkish, with traders paring bets on longer-term interest-rate hikes.
The Stoxx Europe 600 was up 0.2% by 2:17 p.m. in London after the ECB doubled its key interest rate to the highest level in more than a decade through a 75 basis points hike. At the same time the central bank slightly tweaked its policy guidance to remove reference to “next several meetings.”
Rates-sensitive technology shares trimmed declines after the decision, while real estate and banks outperformed.
While the ECB said that it expects to raise interest rates further, it adopted a slightly less hawkish tone. That led money markets to cut rate-hike wagers by as much as 20 basis points, pricing a peak below 2.75% next year. That compares with above 3.25% seen as recently as last week.
“Markets are happy with the more dovish tone of the ECB, as it indicated the pace of tightening would slow going forward,” said Esty Dwek, chief investment officer at Flowbank SA.
ECB to decide how to trim balance sheet in December: Lagarde
European Central Bank policymakers will determine at their next meeting in December how to start winding down the Frankfurt-based institution's huge pile of public and corporate debt.
The ECB would determine the "key principles" to trim its massive balance sheet, which has swelled to trillions of euros over years of expansionary measures aimed at nudging up stubbornly low inflation.