MNI ECB WATCH: ECB To Hike 25bps With Focus On July, September

The European Central Bank is set to raise its key interest rate by 25bps to 3.5% on Thursday and to signal that more hikes are on the way, despite signs of easing inflationary pressures.

While June’s Eurosystem staff projections should show inflation converging to the 2% target by the end of the 2025, prompting sources to tell MNI that rates could peak at 3.75%, perhaps in July, but possibly in September, the ECB’s statement is likely to repeat its commitment to a meeting-by-meeting approach and to keeping rates at sufficiently restrictive levels for as long as necessary to meet the price objective. (See MNI SOURCES: ECB Seen Likely Hiking Twice More)

The ECB will also confirm that it will end reinvestments under its asset purchase programme in July, and President Christine Lagarde could repeat her previous comment that there is still “ground to cover” to reduce inflation.

More hawkish Governing Council members, who in current conditions might envision a rates peak at 4% or higher, may be concerned by sticky core inflation, whose forecast for this year could be revised higher, but policymakers will also weigh the news that Germany has slipped into technical recession, with manufacturing in particular struggling to cope with high energy costs. The ECB had revised upwards its growth forecast for this year by half a point to 1% in March on the back of a strong end to 2022 and a positive near-term outlook. (See MNI INTERVIEW: Europe Faces Slow Growth- German Gov't Advisor).

TLTRO LOANS

With financial conditions continuing to tighten, the ECB’s cheap loans to banks under its Targeted Longer-Term Refinancing Operations are also due to be repaid in June, and officials have previously indicated that a bridge financing loan might be considered if necessary. For the moment, reinvestments under the Pandemic Emergency Purchase Programme are set to continue. (See MNI POLICY: ECB's Reinvestment Wind-Down Equates To 25bp HikeHike).

Headline inflation fell from 7% to 6.1% in April, with core inflation - a key measure of underlying trends - dipping by around a third of percentage point to 5.6% over the same period, with some upside risks easing as China’s economy slows and fears of a U.S. recession persist.