Commerzbank Tweaks ECB View

Commerzbank writes “Russia is supplying only little gas, consumers are moaning about high inflation, companies are unsettled – the economic outlook is clouding over. As part of our monthly forecast meeting, we have decided to forecast a contraction in the German economy for the winter half-year. The eurozone should also be hit by a recession which should cause the ECB to abandon in the end the rate hike process.”

• “The ECB traditionally reacts sensitively to a deterioration in the economic outlook, partly because it assumes that a recession depresses inflation almost automatically. In its projections published in June, for example, the ECB expects inflation to be below its target of 2.0% again at the end of its forecast horizon (2024) if the economy slips into recession. In this case, the ECB would probably suspend its rate hike process.”
• “The question of timing is more difficult. It should be noted that the euro economy grew by 0.7% in the second quarter, much stronger than the ECB had forecast in June (0.2%). Moreover, inflation in July was 8.9%, far above the 7.3% that the ECB had expected in its June projection for the third quarter. Given these massive upside surprises, the ECB is more likely to raise its key rates by 50 basis points than 25 basis points at its early September meeting. For the October and December meetings, we expect further moves of 25 basis points each. At the end of the year, the deposit rate would then be 1.0%. Unlike before, we do not expect any further rate hikes immediately after the turn of the year, as the recession should be more visible in the data then.”
• “The ECB is likely to pause for around a year. Once the recession has subsided and the economy is visibly growing again, it will probably resume its rate hike process in the fourth quarter of 2023. By then, it should also be clear that inflation will only fall temporarily in 2023 and that the deep-seated inflation problem can only be solved with further interest rate hikes.”