ECB: investors on watch for hawkish turn


Sandra Holdsworth, Head of Rates UK at Aegon Asset Management, highlights her expectations for the ECB’s meeting this week.

“The ECB’s Governing Council meets to discuss monetary policy this week. It is highly unlikely that it will change monetary policy at this meeting, although the statement and following press conference will be subject to high levels of scrutiny to see if a hawkish turn is imminent.

“The January meeting tends to be a quiet one for the ECB. There are no updates to staff forecasts and at the last meeting in December the ECB announced the end of the PEPP but a further extension of the APP. In the intervening period the Eurozone has been battling with the effects of the Omicron variant of Coronavirus, energy prices have remained firm, and concern continues to build regarding events in Ukraine.

“Inflation is a worry, but the chief economist Philip Lane recently confirmed that it is their expectation for inflation to return below 2% in 2023 and 2024, albeit that it remains higher than target in 2022. With this background the ECB will not follow the lead from the US FOMC to signal a ‘lift off’ in rates at this meeting.

“Market expectations are centred around this occurring later in the year with a rise in rates of 0.2% to occur by year end. This would be the first ECB increase in rates in over a decade, a period which had an average inflation rate of 1.3%, quite a contrast to the current outlook. An earlier hike in rates is becoming increasingly likely despite the ECB’s timetable regarding asset purchases and inflation forecasts.”

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