ECB Preview: Forecasts from 11 major banks, options open amid heightened uncertainty

The European Central Bank (ECB) will announce its decision on monetary policy on Thursday, March 10 at 12:45 GMT and as we get closer to the release time, here are the expectations as forecast by the economists and researchers of 11 major banks.

The ECB is widely expected to keep its monetary policy settings unchanged at its March meeting, which coincides with the time of the fateful Russia-Ukraine war. This event has put President Lagarde in a tricky spot amid looming stagflation.

Nordea

“Amidst all the uncertainty, we expect the ECB to opt for flexibility by deciding to accelerate the taper of its asset purchases and remove the link between the end of net purchases and the first rate hike.”

Danske Bank

“We expect the ECB to continue its path towards entering a 'neutral' monetary policy calibration and formally set an end date for the APP programme (in September this year), due to the high inflation pressure, but fall short of giving a firm indication of an upcoming rate hike. We expect the ECB to remove the 'or lower' wording from the forward rates guidance and give no time indication between the end of APP and the first rate hike, by removing 'shortly before' from its decision statement. We expect the staff projections will point to 2% core inflation in 2023 and 2024, allowing the policy normalisation process to continue. The ECB is attentive to financial stability and may launch a 1y LTRO operation already in March 2022. We expect a formal end to the TLTRO discount to be set for June 2022, as widely expected. We think markets may be in for a hawkish surprise initially, but for now, we find the 27bp priced for a December hike this year as fair from a risk/reward perspective.”

SocGen

“We expect the ECB to keep the policy stance unchanged while making the forward guidance more flexible and less calendar-dependent. We now believe the ECB will only commit to ending PEPP and raising APP to €40B/month starting in April while leaving further tapering decisions to subsequent meetings. In April or, more likely, in June, we expect a decision to reduce APP to €20Bas of June/July and end it by September. We also expect the ECB to take out the reference to lower interest rates from the rate forward guidance, while removing the reference to ending net asset purchases ‘shortly’ before it starts raising rates to separate the tools and increase optionality. We recently revised up headline inflation this year to 5.7%, and we expect the ECB to raise its forecast materially as well, from 3.2% in December. Importantly, we now expect core inflation to overshoot the target strongly this year and remain around 2% in the coming years, with the balance of risk firmly to the upside. Should the ECB make the same assessment, it will be hard for the ECB to extend the current accommodative policy stance for very long.”

Commerzbank

“Russia's war against Ukraine is causing more and more investors to doubt that the ECB will start the gradual normalization of monetary policy. However, we still think this is the more likely scenario due to the record high inflation rate. That said, the ECB Council is likely to keep a back door open to react to short-term turmoil on the financial markets and an energy crisis that cannot be ruled out.”

Rabobank

“A gradual withdrawal of accommodative policy still seems appropriate, but the ECB may be reluctant to change policy at the March meeting against a backdrop of war. However, the ECB may not be able to delay for too long, due to building inflation expectations and compounding effects of a depreciating EUR on energy prices.  Communication is key and should confirm that the ECB has not changed its trajectory. This should add some hawkish notes to an unchanged policy setting this month. We now expect the APP transition phase to begin as ‘planned’, running at 40B/month in Q2.  The ECB may adjust its guidance on the APP pace to add a hawkish signal and to create a bit more flexibility, preparing for the announcement of a faster taper in April/June. For additional flexibility, the ECB may drop its guidance that APP is expected to end ‘shortly before’ it starts raising rates.”

ING

“We expect the central bank to strike a cautious balance between staying on track for policy normalisation while at the same time keeping maximum flexibility. This strategy would mean the ECB sticks to the already-announced rotation of its asset purchase programmes, i.e. ending the Pandemic Emergency Purchase Programme in March and increasing the Asset Purchase Programme from €20B to €40B, and instead of announcing targets for 3Q and 4Q, announcing a monthly reduction of the net asset purchases by €5-10B per month, starting in May. Contrary to the December meeting, the ECB will want to avoid hinting at end dates for quantitative easing (QE) or start dates for rate hikes.”

TDS

“We expect the ECB to confirm the end of the PEPP at end-March and that the APP will continue beyond then as required, at a pace of €20B/mo. Messaging is likely to reinforce flexibility and patience given heightened uncertainty. Oil prices remain the primary EUR driver, though markets are likely anticipating a dovish ECB. We see early signs of EUR/USD bottoming out, though, but conviction is low given the uncertainty.”

Nomura

“While we expect the ECB to leave its policy levers untouched, we think the Governing Council will effectively decide to delay the point at which it provides the market with more concrete guidance as to the fate of the APP, and thereby the point in time that interest rates are likely to rise. We see the ECB staff lifting their forecasts for inflation to either 1.9% or as high as 2% by the end of the projection horizon (Q4 2024). We stick with our forecast of 25bp rate hikes per quarter from December, with the ECB pausing at the end of 2023 as the depo rate reaches +0.50%. Depending on how it evolves, the Ukraine situation clearly has the potential to delay monetary policy normalisation beyond our current view.”

BMO

“In spite of the downside risks to euroarea growth due to collateral damage from the war in Ukraine, we’re not confident that the ECB will want to lock itself into a further extension of its ultra-loose policy stance, especially with other major central banks looking to continue tightening. This could magnify the downside risks facing the EUR stemming from a further increase in the intensity of the energy price shock. A weaker EUR can act as a natural buffer to a slowing economy, but in the current environment, it could also complicate the ECB’s ability to serve as an anchor to high inflation, leaving room for a policy error later on. So we would not completely rule out an earlier interest rate hike from the ECB, given the potential for instability in the currency. As such, we’ll be listening very closely for any shifts in the ECB’s thoughts on sequencing (i.e. fully ending net asset purchases before rate hikes can begin). We’re not 100% confident a change in the sequence is operationally possible, but the central bank is running out of options.”

UOB

“ECB President Christine Lagarde continues to play down the possibility of rate hikes this year. At this juncture, we still think that the ECB will stick to its road map, and we are still not expecting any rate increases by the ECB until next year. This upcoming monetary policy meeting will be eyed, though, for updated growth and inflation forecasts.”

ABN Amro

“We expect the base case to show inflation around its target over the 2-3 horizon, as well as above target in the coming quarters. Meanwhile, measures of underlying inflation have also risen, albeit still linked to supply shocks/covid and with wages still subdued. Taking all this together, the ECB’s macro base case would still be consistent with an exit strategy. However, the central bank will also likely present an alternative – more negative scenario – with a bigger hit to the economy, which would show an under-shoot of its inflation goal over the medium term. Given this alternative scenario and the level of uncertainty, we expect the ECB to leave its trajectory for net asset purchases under the APP unchanged. The significant tightening of financial conditions over recent weeks also makes the case to put off the exit decision. The ECB would signal extreme flexibility and optionality going forward.”