Will ECB surprise markets with a bigger-than-expected rate hike at 1:15 pm GMT and provide EUR with a boost?
ECB will announce its next monetary policy decision today at 1:15 pm GMT. Apart from the rate decision, the European Central Bank will also publish new economic forecasts. A key question is, however, how big the rate hike will be. While the market expects the deposit rate to be increased by 50 basis points, to 2.00%, some ECB members have suggested that a 75 bp rate move cannot be ruled out. It will depend on 2 factors - whether new inflation forecasts justify it and whether ECB considers early TLTRO III repayments to be a balance sheet reduction. If so, ECB may be reluctant to employ an even more restrictive policy. On the other hand, none of ECB members said that the balance sheet has been reduced significantly already.
Early repayments of TLTRO III loans led to a significant reduction in ECB balance sheet. Source: Bloomberg, XTB Research
āđāļĢāļīāđāļĄāđāļāļĢāļāļāļąāļāļāļĩāļ§āļąāļāļāļĩāđ āļŦāļĢāļ·āļ āļĨāļāļāđāļāđāļāļąāļāļāļĩāļāļāļĨāļāļāđāļāļāđāļĢāđāļāļ§āļēāļĄāđāļŠāļĩāđāļĒāļ
āđāļāļīāļāļāļąāļāļāļĩ āļĨāļāļāļāļąāļāļāļĩāđāļāđāļĄāđ āļāļēāļ§āļāđāđāļŦāļĨāļāđāļāļāļĄāļ·āļāļāļ·āļ āļāļēāļ§āļāđāđāļŦāļĨāļāđāļāļāļĄāļ·āļāļāļ·āļOf course, we should also take inflation into account and price growth in euro area decelerated significantly in November. However, it still sits at 10% YoY - an elevated level. Moreover, recent increases in gas prices suggest that inflation in EMU may not decelerate further. Recent media reports suggest that today's economic projections will show inflation staying above target until 2025, what may cause ECB to hike rates above 3% (market currently sees peak rate at around 2.8%). However, it should be said that latest forecasts pointed to inflation staying above ECB target in 2024 and 2025.
There is a chance for a hawkish surprise today but ECB is known for being a rather dovish central bank. Moreover, ECB tried to pivot but inflation has surprised to the upside since. Nevertheless, should ECB decide on a 75 bp rate hike today, President Lagarde may hint that rates will continue to rise at a quick pace in the future, what would suggest peak rate above 3%.
EURUSD drops 0.6% ahead of ECB decision but the move is mostly driven by yesterday's hawkish Fed. Unless ECB also hits a hawkish note, declines on the main currency pair may deepen further with a drop below 1.05 being possible. On the other hand, a 75 bp rate hike from ECB may send EURUSD towards 1.07 mark. Source: xStation5
