Next week’s ECB meeting is set to be the formal end of ECB net asset purchases and a clear signal to hike rates in July, although without a specific guidance of the size of the first rate hike. We expect ECB net purchases to end on the 1 July, thereby in line with previous guidance for Q3.
With inflation pressures continuing to build and the economic backdrop still supported by services, we do not expect the inflation problem to solve itself in the near future. On the other hand, inflation expectations should gradually decline to the 2% mark in late 2024/early 2025, which leaves a narrow window for ECB to hike between now and the coming 12m.
Market focus will be on the discussion if a 50bp hike is possible, and if so when, as well as to any hints about tools that ECB may take to address fragmentation. We expect ECB to hike 25bp each meeting until Mar23, but risks are clearly skewed for a 50bp rate hike in H2 this year (July or Sep most likely).
