We share the widely expected view that there will be a 50bp hike in all the main reference rates in March. However, the focus will be more on the forward guidance about the next steps to come: the ECB will likely prefer to adopt a fairly “vague approach” with a discourse that will make it clear that a movement of at least 25bp is to follow in May, but not implicitly committing (just leaving the door open) to a 50bp increase. As for the next few quarters, our base-case scenario now contemplates 25bp of extra rate hikes in May and probably another one before the end of 1H23 (for a terminal rate at 3.25/3.50%). However, recent price developments have definitely increased the likelihood of a 50bp hike in May. We still assume that the strategy to be adopted by the ECB will be linked to the “consistency” of rate movements more than the “intensity”.
The disappointing inflation readings in February don’t necessarily mean inflation is getting out of control. We believe that the figures for March and subsequent months may finally confirm the expected moderation. The March reading is bound to represent a closely watched reality check based on which the ECB’s strategy will arguably pivot
We would be reluctant to assume that the bold hawkish statements by some ECB members (defending that four more 50bp rate hikes from current levels are still warranted) represent any trustworthy proxy for the general feelings within the ECB’s governing council. Neither are we convinced that this type of sharp, ‘big bites’ strategy (50bp-by-50bp hikes for longer) would be the most effective one to temper the risk of de-anchoring inflation expectations
If the ECB adopts a relatively cautious approach to its forward guidance for rates (not fully committing to a 50bp hike in May), this would likely prompt some retracement of the recent hawkish movements in the ESTR forward curves. This should not be taken as a definitive adjustment, as the volatile context of rates (and particularly those in the money markets) will likely remain at its highs for several weeks to come
The short tenors in swap and government curves should still enjoy renewed momentum in line with the hawkish reaction to data, whereas the longer tenors are still reflecting the struggle between the upward influence of inflation and the cycle-hangover (downward) effect that could foreseeably materialise in the medium term.