Next week’s ECB meeting is set to bring another 75bp rate hike in all three policy rates. We expect Lagarde to say that the probability of the ECB staff’s downside risk scenario from the September projection exercise is becoming more likely, but fall short of giving new significant policy signals. We expect the ECB to continue to hike its policy rates until early next year, with the risk of potential further hikes if fiscal initiatives support the growth outlook in such a way that inflation remains too high over the medium-term.
Markets will focus on the risk of the ECB ending its APP reinvestments, which will complement the liquidity tightening that will take place as TLTROs mature next year. We do not expect the ECB to present a roadmap on how to end reinvestments at this meeting, but we expect the ECB to announce a change in its reserve remuneration system, which may initially cause some market jitters. We expect the ECB to calibrate the new system in such a way that the market relevant policy rate will continue to be the deposit rate, but we acknowledge risks to short-end credit spreads.