September likely the earliest live meeting for ECB hike

Downward revisions to growth forecasts on the way - The ECB sounded more sombre on the economic outlook. The Council noted that ‘several factors point to slow growth also in the period ahead. The war is already weighing on the confidence of businesses and consumers, including through the uncertainty it brings. With energy and commodity prices rising sharply, households are facing a higher cost of living and firms are confronted with higher production costs’. The reference to the outlook for slow growth ahead seems to contrast to the ECB’s March GDP projections for a 1% qoq jump in both Q2 and Q3 and a buoyant 0.8% rise in Q4. This suggests that downward revisions to the ECB’s macroeconomic staff projections are likely on the way.

More worried on inflation - At the same time, there was more concern on the inflation outlook, in particular because of the possibility of a disanchoring of inflation expectations. ECB President Lagarde noted that ‘while various measures of longer-term inflation expectations derived from financial markets and from expert surveys largely stand at around two per cent, initial signs of above-target revisions in those measures warrant close monitoring’. Indeed, the ECB asserted that ‘the upside risks surrounding the inflation outlook have also intensified, especially in the near term’. The latter seems obvious given that HICP inflation has come in well-above the ECB’s March projection. The medium term upside risks related to ‘above-target moves in inflation expectations, higher than anticipated wage rises and a durable worsening of supply-side conditions’ but ‘if demand were to weaken over the medium term, it would lower pressure on prices’. Although it cited higher than expected wage growth as a risk, it recognised that currently ‘wage growth remains muted overall’.

More confident that QE will end in Q3, but also not before - The ECB maintained that net asset purchases would end in Q3, and clearly had increased conviction of this given the data and developments since the last meeting. At the same time, the Council refrained from bringing the end date forward. President Lagarde explained that a decision on the exact month (during Q3) that the APP will end would be take at the June meeting, also with the aid of the updated projections. The guidance remained that ‘any adjustments to the key ECB interest rates will take place some time after the end of the Governing Council’s net purchases under the APP and will be gradual’. Ms. Lagarde clarified that ‘some time’ could refer to one week or several months. However, it seems unlikely that the ECB would announce in June that the APP would end in July, while also then subsequently hiking its policy rates that month. In practice therefore, the earliest live meeting for a rate hike seems to be September. We have pencilled in the first move in December, though the risks are skewed towards an earlier move.

New anti-fragmentation tool not imminent - The ECB stressed its commitment to preventing ‘renewed market fragmentation’ and hence fighting against excessive rises in country spreads. Once again it stated that ‘PEPP reinvestments can be adjusted flexibly across time, asset classes and jurisdictions at any time’. Furthermore, the ECB President also flagged the possibility of a new tool that could be employed to this end. However, judging by her comments, this was not something that the ECB was currently actively working on and it did not seem likely that such a tool would be announced any time soon. It seems to be more the case that it could possibly announce such a programme if necessary, and Ms Lagarde noted that such a tool could be put together rather quickly in case the situation emerged. (Nick Kounis & Aline Schuiling)