ECB Insight: 75bp a Bit Likelier, But Probably Not the Path of Least Resistance

6 September 2022

By David Barwick – FRANKFURT (Econostream) – Along with financial markets and most analysts, Econostream considers the somewhat likelier outcome of this week’s European Central Bank monetary policy meeting to be a hike of 75bp.

Our reasoning is that already set forth in our member-by-member review published Monday of the Governing Council, an exercise that, while not yielding as unambiguous a result as in July, points to 75bp as a bit more probable on the basis of the number of supporters and the feebleness of the pushback.

Still, as we emphasised already, the alternative of 50bp should by no means be written off. Whilst we find it hard to picture the foundation for a compromise that would support 75bp, so that such a result might only reflect a relatively narrow consensus, there could be ways of inducing Council hawks to accept a ‘mere’ 50bp, thus producing the unanimous or near-unanimous conclusion preferred by President Christine Lagarde.

In particular, if 50bp were to be generally agreed as the new benchmark for hikes in the short term – to the extent the meeting-by-meeting approach permits - then a deposit facility rate (DFR) of 1.5% could still be achieved before year’s end, an outcome with which hawks shouldn’t be too discontent.

Indeed, though we have no doubt that he favours at least considering 75bp, Belgian National Bank Governor Pierre Wunsch five weeks ago declared that his preference was to hike by half-point increments and then perhaps decelerate when the DFR approached 1.5%.

And Banque de France Governor François Villeroy de Galhau on August 27 suggested with respect to a neutral rate, which he said might be between 1% and 2% in nominal terms, that ‘we could be there before the end of the year, after another significant step in September.’

It is not obvious that 50bp couldn’t also be a ‘significant step’ en route to achieving neutrality by end-2022. Meaning that if the additional 25bp constitute a bone of contention that can be easily avoided, the ECB might take the path of least resistance and stick to an uncontroversial 50bp hike.

Clearly, one can argue why either of the two putative options might be the actual outcome on Thursday, which is precisely why we think our favoured result of 75bp is subject to considerable risk.

The supporting role will be played by the updated staff macroeconomic projections. We stick to our reporting of last week, based on insights from an ECB insider, according to whom the new forecasts will see medium-term inflation little changed, while forecasts for 2023 will include substantial revisions to both inflation (upwards) and growth (downwards).

An interesting question here is whether the most recent negative developments with respect to Europe’s energy supply will be taken into account, despite having presumably missed the cutoff date. However, Lagarde recently downplayed the significance of the forecasts, saying that the ECB could ‘no longer rely exclusively’ on them and had to consider the ‘element of judgement’.

Beyond that, we don’t see much emerging from this Governing Council meeting. The approach to policy will remain meeting-by-meeting and for QT it is still somewhat early, at least if hawks get their way in terms of the rate hike.

That said, in an interview with Econostream last week, Bank of Greece Governor Yannis Stournaras did not want to rule out preliminary discussion of how to reduce the ECB’s balance sheet.

Whilst he also said that a change to the tiering system applied to the remuneration of reserves was ‘not a point of urgency at this point’ and could be delayed a little while yet, it is less clear that a decision about this isn’t forthcoming this week.