MNI ECB Review - February 2022: Teeing Up March Inflation Assessment

MNI ECB Review - February 2022: Teeing Up March Inflation Assessment

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ECB Review February 2022.pdf

While the February policy outcomes were in line with expectations (no change on all fronts), the press conference indicated a notably hawkish shift within the Governing Council. Such a marked split between the initial policy announcement and the follow-up presser is quite rare and likely reflects the difficulty facing the ECB as it tries to address concerns about inflation risks, while still clinging on to its baseline assumption that the recent inflation surge will ultimately prove transitory.

Although President Lagarde was careful not to prejudge the outcome of future meetings, there was no doubt about the direction of travel. The Governing Council was said to be unanimously concerned about the recent upside inflation surprises, while inflation risks have now tilted to the upside. When questioned, Lagarde failed to restate her position at the December meeting that rate hikes were unlikely in 2022 and also did not push back against hawkish market pricing. Finally, the optionality and flexibility embedded in monetary policy was stressed, with Lagarde also stating that the GC will make another assessment on inflation at the March meeting when new staff projections are available.

We had previously stated that despite the ECB rigidly sticking with its baseline assumption, the consensus across the GC would likely start to fray if inflation continued to push higher. Given how hawkishly the ECB has now pivoted, a significant revision to the inflation forecasts and a recalibration of monetary policy is the most likely outcome at the March meeting. While some analysts still expect the ECB to take an incremental approach, with policy rate hikes coming later in the year, or even in 2023, it seems unlikely to us that the GC would determine that inflation is now more persistent but then wait until the end of the year (or later) to start raising interest rates. As such, if the GC does switch course and significantly revise its inflation forecasts, while also warning of the elevated risk of persistent inflation, we would take this to mean that the ECB would be quickly moving towards policy rate hikes well before year end.