Exclusive: ECB Insider: ‘I’m Almost Sure’ That December Hike Will Be 50BP

24 November 2022

Exclusive: ECB Insider: ‘I’m Almost Sure’ That December Hike Will Be 50BP
- ECB insider: Hawks can accept slower hiking if terminal rate unaffected and progress made on QT
- ECB insider: Many Governing Council members fear hiking substantially just before a recession
- ECB insider: October’s 75bp hike was already ‘not so easy’
- ECB insider: ECB President Lagarde likely ‘senses that there is no clear consensus for 75’
- ECB insider: See risk of much more political opposition to hiking as soon as some countries enter recession
- ECB insider: Hawks will feel they must ask for 75bp hike even if they expect outcome to be 50bp

By David Barwick – FRANKFURT (Econostream) – The European Central Bank will almost certainly hike rates by 50bp next month, in the view of a Eurosystem insider who spoke to Econostream recently.

With three weeks to go until the Governing Council’s next monetary policy meeting, any expectation is subject to considerable risk, given the large volume of relevant information yet to become available and the ECB’s data-driven, meeting-by-meeting approach.

Still, this particular insider, whose personal preference was quite clearly for a third 75bp increase, expressed the firm conviction that the smaller option would win the day.

‘There are a lot of people in the Governing Council who are afraid of a recession and also feel that there might be some communication problems if we hike rates substantially just before a recession’, he said. ‘And they do not want to repeat the mistake made in 2011, when the ECB hiked just before a recession and then had to reverse course.’

‘I don’t think we’re in a comparable situation, so that’s not my view, but with the first hike of 50 and the second one of 75, there was almost no problem within the Council, but with the last hike of 75 it was not so easy anymore’, he said.

ECB President Christine Lagarde likely ‘senses that there is no clear consensus for 75, and that is why she communicated that maybe we can slow down a bit’, he added.

Whilst reiterating his own strong inclination to go for 75bp yet again, the insider readily conceded that ‘I’m almost sure that there will be 50’ as an outcome.

Besides a certain balancing act between growth and inflation facing the ECB, a ‘trade-off’ that has become especially relevant and is of particular importance to the Council hawks is the issue of quantitative tightening, he noted.

The hawks ‘would like to talk about QT, and so therefore they can accept a slower pace as long as the slowdown is not reflected in the terminal rate’, he said. ‘But in the end, they need some commitments about talking also about the balance sheet going forward.’

This however was ‘not so easy’, he said, given there are deep concerns about the viability of a serious QT effort. Several countries were ‘really opposed’ to any open discussion of QT or its inclusion in official communication, he said.

Nonetheless, in essence, the deal some of the more hawkish monetary authorities will ultimately seek in December, he said, could be expressed in the sentiment, ‘Okay, you can have 50, but it doesn’t mean that the terminal rate is going down, and we need a good communication also on QT.’

Still, he said, ‘tactical’ considerations would likely drive the hawks to aim higher. ‘Even if they know ex ante that the outcome will be 50, they have to ask for more, because otherwise there could be a feeling that now we did most of our job and can slow down’, he said. ‘That is the reason why some of the governors will ask for 75, even if they know almost for sure that it will be 50.’

With respect to the apparent willingness of Council member and prominent hawk Klaas Knot, as expressed in his monetary policy speech last Friday, to contemplate a smaller rate hike than at the last two meetings, the insider commented that Knot ‘would like to have a quite clear roadmap for QT, and he’s willing to sacrifice 25 [bp] for that.’

Arguing in defence of the larger option he himself would support but did not expect to materialise, this insider said that a decision of 50bp would entail not merely a risk of creating the false perception that the ECB is largely done in the fight against inflation.

‘That is a risk mainly for communication’, he said. ‘But what I feel is a real risk is that when there are the first signs of recession in some countries, there will be much more opposition from the public and also from politicians to stop hiking.’

The currently still ‘relatively okay’ economic situation thus makes the ‘frontloading argument’ attractive, he said, especially in the context of continued high core inflation and repeated upside surprises with the headline measure. Moreover, a relatively strong rate hike was unlikely to significantly deepen a recession currently expected to be shallow at most, he reasoned.

If the deposit rate, now at 1.5%, were closer to 2.5%, then a deceleration would make sense, ‘but right now I don’t think we are so close as to think about slowing down and tinkering with the terminal rate’, he said. ‘We still should go at a healthy pace towards the terminal rate.’

The PMIs released yesterday showing weaker euro area inflationary pressures were ‘one of the first positive signals’, but with core HICP still ‘stubbornly high’, he said, ‘it’s not a signal that our job is done and we should relax.’