Markets
The ECB raised its key policy rates by 50 bps, bringing the deposit rate at 2%. The central bank sticks to its hawkish guidance saying that they aim to significantly raise them further at a steady pace based on the substantial upward revision to the inflation outlook. During the Q&A session, ECB Lagarde said that a steady pace means increments of 50 bps – a stark difference with yesterday’s Fed message suggesting a downshift to 25 bps from next year onwards. Keeping interest rates at restrictive levels will over time reduce inflation by dampening demand and will also guard against the risk of a persistent upward shift in inflation expectations. The ECB raised its average CPI forecasts for the 2022-2024 period from 8.1%-5.5%-2.3% in September to 8.4%-6.3%-3.4% with the first indication for 2025 at 2.3%. Inflation is thus set to remain above the 2% inflation target over the policy horizon even as the ECB will go into restrictive territory from next year onwards. Underlying core CPI is expected to average 3.9% this year and rise to 4.2% in 2023, before moderating to 2.8% and 2.4% in 2024 and 2025 respectively. Risks remain primarily to the upside, especially in the near term. The central bank puts forward a relatively short-lived and shallow recession with growth forecasts at 3.4% this year, 0.5% next year, 1.9% in 2024 and 1.8% in 2025. Higher interest rates will from March 2023 onwards be complemented with an end to the reinvestment policy of the roughly €3.2tn APP portfolio. The decline will amount to €15bn/month on average until the end of Q2 2023 and its subsequent pace will be determined over time. The ECB’s hawkish message hit complacent markets in the face. German yields add 8 bps to 26 bps on a daily basis with EUR/USD feeling the tailwind and surging beyond 1.07. European stock markets lose 3%.
The Bank of England followed the downshift to 50 bps, lifting the policy rate from 3% to 3.5%. Three out of nine governors dissented. One in favour of a 75 bps hike and two in favour of unchanged rates. BoE governor Bailey confirmed that the majority judged that further increases will follow should the economy evolve broadly in line with the November projections. Inflation may already have peaked, but risks remain very high in the next few months and located on the upside. The BoE expects the UK economy to be in recession now with fiscal stimulus raising the end of 2023 GDP forecast by 0.4%. The central bank pointed at last month’s reference to the market implied policy rate path, which by that time was thought to be too aggressive. Market pricing shifted downward since, expecting a 4.5% policy rate peak by mid next-year, something the Bailey and co can align themselves with. UK yields fell around 5 bps across the curve with EUR/GBP moving away from the 0.86 big figure and the ECB accelerating the move.
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Norway’s central bank lifted its policy rate by an expected 25 bps to 2.75% today. The Norges Bank said that the previously delivered tightening started to have an effect on the economy, perhaps even more than expected in September. Mainland growth was revised lower to 0.6% for next year and 2024. This hangs in the balance with a slightly tighter labour market than anticipated and above-target inflation of 6.5% (5.7% core) in November. Monetary policy-relevant CPI forecasts were revised upwards in 2023 (5.2%), 2024 (3.6%) and 2025 (2.7%). On balance, the Norges Bank believes additional tightening will be necessary in Q1 2023. It remains data-dependent but for now kept the expected terminal rate at 3%, meaning the cycle may be close to the end. All in all, the December meeting held little new information, causing few ripples in Norwegian swap rates and the krone. EUR/NOK trades slightly higher, just north of 10.4.
Switzerland, 50 (basis) points. The SNB brought the policy rate to 1% today and with it a straightforward analysis. Inflation (3% in November) declined in recent months but remains above the 2% target. New forecasts see inflation dipping from 2.4% in 2023 to 1.8% through 2024 before picking up again to 2.1% in 2025Q3. Hence the need for further rate hikes, even as growth is seen at a mere 0.5% next year with risks mainly tilted to the downside. The SNB stays committed in intervening in FX markets to support the franc to achieve the “appropriate monetary conditions”. SNB president Jordan during the press conference said the central bank has indeed done so in recent months. EUR/CHF trades unchanged at 0.9875 with a slightly stronger euro post ECB keeping the franc in check.
