ECB Meeting Preview

With economists and traders divided on what the ECB will do tomorrow, there could be fireworks in the markets after the meeting.
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How much?

Everyone agrees that the ECB will try to make a strong statement about controlling inflation. What is up for debate is whether it will be a hike of 50 or 75bps, with economists evenly divided in both camps. On the one hand, commentary from ECB officials ahead of the blackout period showed a strong commitment to aggressively tackling inflation. Only Chief Economist Philip Lane has publicly said he's in favor of a more gradual approach.

The move echoes other central banks, seeking to "anchor" inflation expectations near target by signaling determination to fight inflation, in an attempt to keep prices from getting out of hand. But it might be too late at this point, with inflation in the shared economy at a record high, and no sign of quitting. Additionally, price pressures have been coming from energy primarily, followed by food, both as part of the effects of the war in Ukraine. That's something beyond the control of monetary policy.

The future is what matters

Concurrent with the rate decision, the ECB will announce updated staff projections. The last update released in June still forecast the economy growing at 2.1% this year. Perhaps more hilariously, they also forecast inflation of 2.1% next year. With many economists talking about Europe entering a recession this winter, it's expected that those forecasts will be revised.

Then it becomes a question of how much more hiking the ECB can manage before the economy changes direction. If a recession is indeed coming in just a few months, then price pressures might abate and the ECB could get away with less tightening. Therefore, how the market reacts to the interest rate decision might be determined by how much the staff projections are adjusted, since that would help clear up expectation for the future rate path.

Waiting for the breakout

Key takeaways

Economists are divided on whether the ECB is going to hikes rates by 50 or 75 bps despite its commitment to tackle inflation. Inflation has been high for a while and is unlikely to stop with monetary policy as it comes primarily from supply issues and the effects of sanctions on Russia.

In light of the recent talks about recession, the ECB is expected to revise forecasts for GDP and inflation. Price pressures might abate if the recession comes and the ECB could get away with less tightening.