In Brief:

• Analysts unanimously expect a 50bp hike in February

• Most analysts think the ECB will encourage expectations of another 50bp in March

• A minority of analysts expect the ECB to step down the pace to 25bp in March

• OIS markets are pricing similar expectations: 50bp for Feb and a further 45bp in March

• Markets are pricing in 141bp of hikes by end-2023, 34bp more than after December’s meeting

• No new macroeconomic projections will be released

• The ECB has said it would announce the detailed parameters for reducing the APP holdings

• Most analysts expect no particular surprises with respect to QT

Barclays: expect a 50bp hike. See Lagarde repeating her hawkish line from December with respect to March. Still, depending on developments, March could bring just 25bp. Expect to get insights into the reduction of the APP holdings, especially whether the ECB will engineer the process to remain consistent with the capital key and maintain a steady monthly pace. See some risk of Lagarde indicating that APP redemptions would be rolled off to the full extent from 2H.

Rabobank: expect a 50bp hike. Don’t think the ECB will be as explicit about another 50bp hike in March, however, as there remains potential for a deceleration then to 25bp, which – subject to upside risks – is our expectation. On QT, the ECB may share that the drawdown of the APP will be proportionate across asset classes and in line with the capital key.

SG: expect a 50bp hike. The ECB will continue to sound hawkish, given economic resilience and elevated inflation; indeed, we expect Lagarde to counter market dovishness strongly and assume the ECB sees itself as able to raise rates some more without inducing an economic slump. We see the ECB hiking by 50bp in March and 25bp in each of May, June and July, implying a terminal rate of 3.75%, with upside risk. On QT, we expect no surprises.

GS: expect a 50bp hike. December’s guidance seems likely to continue, indicating another 50bp hike in March, though the updated inflation outlook could be important.

BofA: expect a 50bp hike. The ECB will repeat its hawkishness of December, thus flagging another 50bp hike in March, though Lagarde will also underscore the importance of the next set of macroeconomic forecasts. There is some risk of a hawkish surprise in the sense of a signal that the ECB will stay the 50bp course beyond March or hike into 2H. On QT, we expect no surprises, whilst anticipating that at least to start, reduction of APP holdings will be proportionate.

Citi: expect a 50bp hike. The ECB will signal another 50bp hike in March. Don’t expect the level of QT post-2Q to be decided, but the tone could be hawkish.

NWM: expect a 50bp hike. The ECB will maintain the level of hawkishness seen since December, with a reiteration of a ‘steady pace’ signalling another 50bp hike in March, the possible exception being if inflation surprised on the downside in January. Our central scenario is a terminal rate of 3%, with some upside risk. On QT, we expect no surprises.

Danske: expect a 50bp hike. The ECB will again be very hawkish, flagging another 50bp hike in March and further tightening thereafter (we see 50bp in March and 25bp in May). Lagarde will want to see financing conditions tighter.

ING: expect a 50bp hike. The ECB will most likely reiterate guidance about another 50bp hike in March, though the updated staff forecasts then will play a big role in the final decision. On QT, the ECB may share whether the APP reduction will proceed proportionately across asset classes, along with details about adherence to the capital key. Nordea: expect a 50bp hike. The ECB will support the expectation of another 50bp hike in March and be generally hawkish, though there is a risk of dovish elements, depending in particular on January inflation data.

JPM: expect a 50bp hike. The ECB will fairly clearly indicate its plans to hike again by 50bp in March, but is unlikely to provide much guidance for thereafter. We expect the ECB to hike by 25bp in May, for a terminal rate of 3.25%. On QT, we anticipate nothing with regard to 3Q yet, but might learn how the ECB will handle maturity differences across countries and the implications for the capital key.

Investec: expect a 50bp hike. We expect another 50bp hike in March and 25bp in May, for a terminal rate of 3.25%. Cutting rates could happen early next year. Swedbank: expect a 50bp hike. The ECB will make clear that more rate hikes are coming, but we see the pace at only 25bp in March, May and June, with a terminal rate of 3.25%. Rate cuts will begin in early 2024, with a total reduction of 125bp by the end of the year.

Berenberg: expect a 50bp hike. The ECB will avoid naming its terminal rate but is likely to reiterate the intention to hike by 50bp again in March and to indicate that an undefined further amount of tightening will occur in 2Q. We expect a final 25bp hike in May, for a terminal rate of 3.25%, with risks to the upside. Lagarde will probably seek to counter any talk of rate cuts towards the end of 2023 or at the beginning of 2024. On QT, the ECB may say that monthly amounts will vary with redemptions

Recent comments from ECB Governing Council members:

Christine Lagarde

15 December 2022

‘Based on the information that we have available today, that predicates another 50-basis-point rate hike at our next meeting, and possibly at the one after that, and possibly thereafter, but everything will also bedetermined by the review of data. So don’t assume that it’s a one-shot 50; it’s more than that. I don’t know how many more times. So it shouldn’t be regarded as the new normal, but in the current circumstances, we believe that this the right approach on a steady-pace basis.’

Isabel Schnabel

10 January 2023

‘We judge that interest rates will still have to rise significantly at a steady pace to reach levels that are sufficiently restrictive to ensure a timely return of inflation to our 2% medium-term target.’

Philip Lane

17 January 2023

‘…now we have the policy rate at around 2%, which is in the “ballpark” of neutral. Yet we are still not where the risks become more two-sided or symmetric. So, we need to raise rates more. Once we’ve made further progress, the risks will be more two-sided, where will have to balance the risks of doing too much versus doing too little. This is not just an issue about the next meeting or the next couple of meetings, it’s going to be an issue for the next year or two. It’s important to remember that we meet every six weeks. We will have to make sure we take a data-dependent, meeting-by-meeting approach, to make sure we adjust to the evolution of the two risks. What does that mean? We have to keep an open mind on the appropriate level of interest rates. The big error would be maintaining a misdiagnosis for too long. The risk is not what happens in one meeting or in two meetings. What happened in the 1970s was a misdiagnosis over a long period of time. The issue here is flexibility in both directions to make sure that policy is adjusted in a timely manner,rather than maintaining a fixed view of the world for too long.’

Fabio Panetta

24 January 2023

‘Monetary policy operates with lags, which means that the effects of the fastest tightening in the ECB’s history have not even started to be fully felt. We need to take those lags into account to avoid having to reverse course, which would be costly given the lower flexibility of the euro area economy compared to economies like the US. We need to keep our policy dependent on incoming information, providing markets with the necessary conditional guidance on the basis of our reaction function. We should do all that is necessary to bring inflation down to 2% without undue delay, at the minimum cost to the economy.’

Joachim Nagel

25 January 2023

‘For February and March we have announced that we will raise interest rates sharply again. Then we will look at where the inflation rate is in the spring and what the forecast of our experts will look like then. I wouldn’t be surprised if we have to keep raising interest rates even after the two steps that have been announced.’

François Villeroy de Galhau

5 January 2023

‘…after raising interest rates to close to the “neutral interest rate” of 2% in December, we are now embarking on the second phase towards monetary stabilisation: ideally, it would be good to reach the right “terminal rate” by next summer, but it is still too early to say what that level will be. We need to remain pragmatic and to be guided by observed data, including on core inflation, without getting fixated on overly mechanical rate hikes. We will then be prepared to remain at this terminal rate for as long as necessary: the sprint to raise interest rates in 2022 is now becoming more of a long-distance race, and the duration will count at least as much as the level.’

Ignazio Visco

23 January 2023

‘…monetary policy action can only continue in the direction taken. However, normalisation needs to proceed with the necessary gradualness, bearing in mind that, as I have observed, medium- to long-term inflation expectations are anchored and there are no signs of spirals between prices and wages…’

Pablo Hernandez de Cos

11 January 2023

‘Looking to the future, the Governing Council expects to continue increasing interest rates significantly in the coming meetings, at a sustained pace, until reaching sufficiently restrictive levels to ensure that inflation returns to the 2% target in the medium term.’

Klaas Knot

21 January 2023

‘‘The policy conclusion is that what our President Lagarde said in December is even more valid today. We will still have to raise interest rates significantly and bring them into a sufficiently restrictive territory to ensure a timely return of inflation toward our target. […] I entirely agree [that the ECB will hike by 50bp in February].

And not only in February. I think our President has been very clear. We made a step down in December from 75 to 50bp. That will be the pace for a multiple number of meetings. So that means at least the two in February and March.

from ITC