The ECB is expected to continue making its decisions based on data

While the European Central Bank (ECB) is considered certain to raise the policy rate by 25 basis points at its meeting tomorrow, the bank is forecast to continue with its data-driven decision-making method for the coming period.

The monetary policy decisions to be announced by the ECB, which continues with its “hawk” policies in the area of ​​the fight against inflation, and the verbal guidance of the ECB President, Christine Lagarde, have been in the spotlight of the investors.

Although the expectation that the bank will raise interest rates by 50 basis points in total until the end of the year stands out in the setting of prices in the money markets, it is expected that the macroeconomic forecasts announced by the ECB at this meeting will have an impact on asset prices and market expectations.

‘UNLESS THERE IS A DECREASE IN CORE INFLATION…’

In his assessment, ING Group Chief Economist Peter Vanden Houte said a 25 basis point increase seems certain for tomorrow’s meeting.

However, Houte said the case for an interest rate hike had weakened as the economic outlook had turned more pessimistic and inflation had eased, but said the ECB was likely to ignore this.

Houte asserted that the ECB can continue its tight monetary policy as long as there is no significant decline in core inflation.

Recalling ECB Board member Isabel Schnabel’s remarks that it would be a bigger mistake to do too little rather than too much in terms of interest rate hikes, Houte stressed that the new economic forecasts could also be interesting. .

“Forecasts made in March indicated a very healthy growth outlook,” Houte said.

However, based on the latest data, Houte noted that this estimate will likely need to be lowered and therefore predicted that the bank would raise interest rates by an additional 25 basis points in June.

Houte stated that after that, the ECB could probably switch to a wait-and-see policy.

THE FOCUS OF INTEREST MAY BE NEW ECONOMIC FORECASTS

Elwin de Groot, head of ECB and euro zone macro strategy at Rabobank, said keeping the medium-term inflation forecast just above 2 percent in the new forecasts may indicate markets are weighing in on rate cuts. too soon.

Conversely, Groot said that if the target is lowered in the inflation outlook, this may weaken hawkish statements for a long time, adding that the focus may be on the ECB’s new economic forecasts.

Stating that there will be no policy changes at the June meeting, Groot said markets priced in the 25 basis point increase.

Groot said that as the ECB approaches the expected end point in the interest rate hike cycle, the discussion has evolved from how much of an increase is needed to how long it takes for the ECB to keep policy rates at their peak, adding that new macroeconomic forecasts may help. the bank in this situation.

Expressing that the bank may lower its inflation forecast a bit, Groot said: “The forecast for 2025 inflation may be slightly above the inflation target to signal that the current price of interest rate cuts, which is expected to early next year, it’s not in line with when inflation will return to target.” he performed the assessment of it.

Stating that inflation may take time to return to target, Groot asserted that the ECB may have to wait until mid-2024 for interest rate cuts.

‘DEBITS MAY DEVELOP AROUND THE INFLATION OUTLOOK’

Berenberg’s chief economist, Holger Schmieding, also said ECB discussions could develop around the inflation outlook.

“The pigeons could argue that lower inflation, Fed rate cuts and a stronger euro next year should support ECB rate cuts,” Schmieding said. But the famous hawks would likely argue that tight monetary policy should be abruptly suspended if there is data to support that inflation could settle at around 2.5 percent year-on-year instead of 2 percent.

Schmieding said the ECB is ready for a 25 basis point hike at its June meeting.