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Daiwa Capital Markets Expect Two Further Rate Hikes

  • Daiwa interpreted Lagarde's comments to suggest that the hawks continue to remain in the majority on the Governing Council. And as a clear downtrend in the main core inflation measure might not be evident until the end of Q3, Daiwa now expect two further hikes of 25bps apiece to come in June and July to take the terminal deposit rate to 3.75%.
  • Given recent euro area macroeconomic data - including the only very slight drop in core inflation to 5.6%Y/Y in April, the further decline in the unemployment rate and the signal of a pick-up in economic growth momentum led by Southern Europe in today's final PMIs for April - the ECB will judge that its macroeconomic projections published in March, remain broadly on track.
  • But those forecasts saw inflation returning back close to target from early 2025. And while core inflation remains high and sticky, and the risks to the inflation outlook are still considered to remain skewed to the upside, Lagarde noted that a range of measures of underlying inflation should be watched closely.
  • Notably perhaps, she flagged the PCCI (Persistent and Common Component of Inflation) measures, which peaked several months ago and in March were already 1½ppts or more below the current core rate. Some ECB staff will believe those measures provide a better guide to the path of inflation ahead, and many will be wary of the Governing Council tightening policy too far due to an excessive focus on past rather than future inflation.

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