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The European Central Bank is expected to announce the end of net new asset purchases following its June Governing Council meeting, while likely signalling a 25bps rise in the deposit rate as early as July , with rising price pressures trumping fears of slowing eurozone growth and market fragmentation.
The fresh Q2 Eurosystem staff macroeconomic projections are expected to confirm inflation at target over the projection horizon, meaning bond buying under the Asset Purchase Programme will, as signposted, end in early Q3, paving the way for a "benchmark" 25bps hike next month. Both policy moves were recently telegraphed by president Christine Lagarde and chief economist Philip Lane, with a further hike seen in September, taking the deposit rate out of negative territory (MNI SOURCES1: ECB Seen Making Two To Three 25-BP Hikes In 2022).
Debate is therefore likely to focus on the pace of monetary policy normalisation, with questions regarding the precise location of the equilibrium rate -- a point of considerable disagreement among GovCo members -- unlikely to be answered publicly.
DEBATE ONGOING
A 50bps increase, touted as a possibility in recent weeks by national bank governors Holzmann, Knot and Kazimir, is not impossible and will be debated, but is not yet supported by a majority of governors, who still favour a gradualist approach (MNI INTERVIEW: ECB Scicluna: Little Support For 50BP Hike), despite average euro area HICP running at 8.1%.
President Lagarde will instead stress that raising rates will be vital in ensuring that inflation expectations do not become deanchored, while emphasising the need to remain data-dependent, flexible, and attendant to downside risks to growth and foreign exchange developments.
Some policymakers are already raising concerns over the impact of higher rates on peripheral bond spreads, and the ECB is expected to state that financing conditions remain manageable. Equally, it will reaffirm its strong commitment to ensuring the smooth transmission of ECB monetary policy across the euro area via continued PEPP reinvestments through 2024, and, if necessary, new tools -- although no details are likely to be forthcoming (MNI INTERVIEW: ECB To Overcome Obstacles To New Crisis Tool).
Having announced earlier this week the option of early repayment for participants in the ECB’s pandemic-specific targeted longer-term refinancing operations, confirmation that the special conditions applicable under TLTRO III will end in June is probable. Press questions may also focus on whether the ECB would be prepared to offer special green lending rates, with Lagarde having last week expressed some openness to the idea.
Source: ECB
Why MNI
MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.