For next week’s ECB meeting, another 50bp rate hike has been well telegraphed and fully priced by markets. We expect the ECB to continue to sound very hawkish and signal that further rate hikes are coming, in particular giving guidance for another 50bp hike in March. The ECB surprised on the hawkish side in December, which immediately tightened financial conditions, but during January financial conditions reversed back to pre-December levels. Consequently, we expect Lagarde to give a strong reminder to markets to tighten financial conditions.
Since the December meeting, the economic outlook has brightened, but this is a double-edged sword for the ECB. While headline inflation declined in December and is expected to head lower throughout most of the year, the stickiness of underlying inflation remains a headache for the ECB.
On the technical side, the ECB said at the December meeting that it will publish the technical details of the reduction in the APP portfolio.
