ECB: Expectations for Central Bank tightening in 2023 rise


One of the central banks whose decisions will be revealed this week is the ECB. The ECB will likely remain on hold, but assesses that the Bank may drift into a more hawkish trend due to market mood-challenging inflation pressures. No change in interest rates is expected from the ECB at the first meeting in 2022. While the BOE made a surprise interest rate increase in December, the Fed will start to increase interest rates as of March. Regarding the inflation reaction of monetary policy, the ECB is in a lagging position and CPI inflation, which has reached 5.1% as of January 2022, has put the possibility of a rate hike on traders’ radar before this year.

Lagarde will likely reiterate that the central bank is unlikely to raise rates in 2022, but will also avoid pulling back market expectations for tightening in 2023. We expect the European Central Bank to use this meeting to guide market expectations regarding rate hikes. In our opinion, if central banks were renewing their economic projections in their current meetings, they would have included higher inflation forecasts in their models. The price developments in the last 1 month indicate that the current pressures are far from the cooling point and geopolitical risks show an extra effect that may come from energy prices. If Continental Europe, which is dependent on Russian gas, is exposed to a possible gas shortage, the industry will slow down seriously and product prices will be pressured upwards. Currently, January developments in oil prices increase the commodity price index in the world.

ECB OIS pricing… Source: Bloomberg

 The ECB may choose to play unfair at the point of policy tightening relative to inflation. Because, it is likely that the updated policy expectations will push the Central bank more to avoid tightening. On the other hand, the risks of slower growth will cause the ECB to refrain from giving a quick signal to raise interest rates in 2022. The perspective they adopted before that pointed to a cautious policy shift, which worried about slower growth due to supply-related risks both to Omicron and to the production line. But if they can’t escape the reality of inflation, they could enter a phase of the year similar to the one the Fed went through in late 2021.

Comparison of changes in implied expectations for ECB policy rate (December 2021 – January 2022)… Source: Bloomberg

 In detail; The ECB Governing Council will discuss the transition to higher interest rates within itself. This may be a sign that the Bank has shifted to a more hawkish spot compared to the past, so we will also pay attention to member-based statements and meeting notes to be published. We think that the situation regarding asset purchase operations will take place as we predicted in the previous month and that the ECB will be completely out of APP purchases by the end of this year. Official announcements of targeted long-term refinancing operations are unlikely, but Lagarde can provide some additional details on upcoming changes.


Kaynak: Tera Yatırım
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