The Fed meeting this week has turned the ECB meeting on Thursday next week much more interesting than anticipated from a market perspective. While we do not expect the meeting to bring significant new signals to the market, attention to the elevated inflation and even more data dependence as well as the difference to Fed will be in focus.
Since the December meeting, where ECB communicated its planned monetary policy calibration until October 2022, no data release has warranted a change in stance. We expect ECB to convey a robust, yet slowing, economic outlook and an elevated uncertainty on the inflation outlook with a confirmation of inflation expected to settle below the 2% target towards the end of the year and in 2023 and 2024.
We expect attention to the recent rise in real rates, but given the absolute level of the metric, we do not believe this would give cause for concern at the ECB.
We do not see ECB giving indications to follow the other major central banks in their tightening cycle. To us, it would be a surprise if ECB were to announce new TLTRO rounds at the meeting next week. We continue to expect tiering multiplier to be increased to 12 later in the year (most likely in June).
From a near-term market reaction perspective, we remain unconvinced whether markets will buy into the ECB’s wait-and-see stance and keep the very aggressive front end pricing for Dec22 (which are 21bp).
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