ECB: Rate hike and hot QT issue

On Thursday, December 15, right after the Fed’s statement tonight, the European Central Bank will make key policy decisions. The general expectation is that the size of the rate hikes will decrease from 75 basis points to 50 basis points, just as in the case of the Fed. In this context, it is estimated that the ECB Governing Council will increase the three main policy rates by half a point. The decision on interest rates at the monetary policy meeting will likely be the least contentious part.

One of the issues to be speculated will be quantitative tightening, there is more uncertainty about QT since many economic variables are effective and the actual monetary tightness level is determined by the balance sheet position. The second phase of the ECB’s balance sheet reduction round is expected to begin in the 1Q23 sequence. The Governing Council is likely to announce that its holdings will begin to decline as of 1Q23, when it stops reinvesting at least a portion of the proceeds of the approximately €30 billion bonds that mature each month on average.

ECB Governing Council: Hawks and Doves. Source: Bloomberg

On economic forecasts; The ECB may revise its inflation forecasts and set a headline peak in 4Q22. Headline inflation in the Eurozone was 10% as of November, and peaked at 10.6% in October. Therefore, although the forecast for 2022 in September will slide up from 8.1%, the expectations for 2023 and 2024 may also be affected. September forecasts pointed to 5.5% inflation for 2023 and 2.3% for 2024. Uncertainty regarding the Russian energy crisis will of course affect the deviation range here. Another topic that will be affected by a similar dynamic will be GDP projections. Although the recession has not been realized yet, it is a phenomenon that has been voiced more loudly for the Euro Zone. Projections here could be lowered to show a shallow recession where the economy will contract this quarter and the next. The September forecasts were 3.1%, 0.9% and 1.9% for 2022, 2023 and 2024, respectively. Although the growth path shows more intense risk for 2023, leading indicators may reveal the beginning of the recession as 4Q22.

The European Central Bank appears to have converged at a slower rate of increase, but there will be strong debate about when it should start quantitative tightening. With headline inflation likely past its peak and policy rates heading into constraining territory, the need for aggressive action is waning. Still, central banks haven’t finished their rate march yet due to sticky core inflation.

Kaynak: Tera Yatırım-Enver Erkan
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