Next week’s ECB meeting is largely a prelude to the December meeting, where new staff projections will base the foundation for the exact calibration of its instruments.
We expect ECB to flag risks to the outlook and as such not deviate from the current baseline and send new policy signals already now but wait for a new projections round in December. The September projections are already outdated given the recent spike in energy and slowing growth outlook. That means that we still expect ECB to repeat that they believe that the current inflation outlook is largely transitory, as Lagarde also said this weekend, but that narrative will be tested until the December meeting.
We believe that ECB will attempt to make the meeting as uneventful as possible. From a market perspective the euro area rates have been driven by the BoE’s change in tunes as well which have also raised concerns about the transitory narrative ECB is conveying. We expect significant pushbacks against the current rate hike pricing in December 22.
What if: Markets are already testing ECB on its narrative. For ECB to ‘give in’ to the current market pricing (with rate hike priced for Dec22), we would need to see ECB acknowledging upside risks to underlying inflation and risk of inflation expectations being entrenched already next week as a first step. That will later open the possibility for APP and change of forward guidance in reasonable time (H1 next year) for a rate hike to materialise. In our extreme scenario (5%) we can see an ECB hike in mid-2023, see more in COTW: What if inflation is coming. Can ECB hike in 2023?
