ECB Gathers Amid Growing Dissonance Over Trajectory For Rates

When the European Central Bank sets interest rates on Thursday, attention will be on the increasingly acrimonious path that lies ahead.
ECB Gathers Amid Growing Dissonance Over Trajectory for Rates
ECB Gathers Amid Growing Dissonance Over Trajectory for Rates

When the European Central Bank sets interest rates on Thursday, attention will be on the increasingly acrimonious path that lies ahead.

Despite its insistence on decisions being taken “meeting by meeting,” investors have grown accustomed to getting a preview of where borrowing costs are likely to head in the ensuing weeks and even months.

But with officials bickering over how much guidance is appropriate and what measure of inflation they should focus on, providing a clear message will prove trickier than at any point in what’s already the most forceful bout of monetary tightening of the euro era. 

There’s little if any pushback against the plan to lift the deposit rate by another half-point this week. Any doubts were laid to rest by February’s dire reading for euro-zone underlying inflation, which kicks out volatile components like food and energy.

But tensions among rival factions within the 26-member Governing Council over the path beyond March are already spilling out into the open. After Austria’s Robert Holzmann last week urged four more hefty rate rises, Italian central bank chief Ignazio Visco slammed colleagues advocating “prolonged” increases.

Such public sparring throws into question whether ECB policymakers can present a “unified picture” of their monetary-policy roadmap, warns Joerg Angele, an economist at Bantleon in Zurich.

“While the hawks keep calling for new interest-rate hikes with reference to the core inflation rate, the doves are now increasingly speaking out and calling for a cautious approach,” he said.

Fresh gross domestic product and inflation projections through 2025, also due Thursday, probably won’t settle that debate.

Analysts polled by Bloomberg see forecasts for headline price gains being lowered from last quarter’s outlook after a plunge in energy costs. The path for core inflation, though, may be revised higher — at least in the near term.  

That risks intensifying a debate that was already underway in February, according to an account of that month’s gathering. Officials discussed how much weight to place on the underlying gauge, with one argument being that “some elements of core inflation could move quite quickly.”

Such uncertainty is reflected in analysts’ views of how far the ECB must tighten.

The median estimate in a Bloomberg poll this month was for a 3.75% peak in the deposit rate — up from 2.5% now — with three quarter-point steps to follow the upcoming bigger move.

Goldman Sachs and Deutsche Bank are among those backing such an outcome. Morgan Stanley, Barclays and Bank of America, however, predict a so-called terminal rate of 4% — the level money markets had been betting on until a retreat Friday to 3.88%. At the lower end, HSBC and ING see only 3.5%.

“Given we know what’s going to happen this week, of course we’re all looking for signals on May,” said Karsten Junius, chief economist at Bank J Safra Sarasin. “But the Governing Council should resist the temptation to tell us what’s going to happen, because two months is a long time. We’ll have two more inflation readings by then.”

Resilient European output could slow the moderation in those figures. Jobs markets have held up especially well, pushing labor unions to seek double-digit pay boosts that would compensate lost purchasing power.

For Ulrike Kastens, an economist at asset manager DWS, such signals — alongside the worrying data on underlying prices — mean the ECB must “give a hawkish message that it takes the inflation problem seriously.”

What Bloomberg Economics Says...

“The hawks will probably push for some form of guidance that another half-point hike will come in May and we expect President Christine Lagarde to indicate that a further significant increase in rates is likely to be needed, although all decisions will remain data dependent.”

—David Powell and Maeva Cousin. For full preview, click here

Conveying its stance without causing unwanted gyrations in financial markets — where concerns over the fallout of monetary tightening on the banking sector are mounting — may still prove difficult. Investors have been quick to reassess their wagers in recent weeks after a barrage of comments from officials.

The waters could become particularly muddied if ECB hawks are unable to ensure some kind of commitment to another half-point rate move at the next meeting, according to Jussi Hiljanen, SEB’s head of European macro and fixed-income research.

“It will be a massive challenge, especially if the press release is less explicit on signaling 50 basis points for May,” he said. In such a case, striking the right balance “will be a daunting task” for President Christine Lagarde.

--With assistance from .

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