The ECB Will Respond to Inflation Pressures More than Growth Concerns
At least this is the playbook of central banks around the world. The BoE, the RBA, the Fed, and the RBNZ are all responding to high inflation by hiking rates. That much is not surprising since the only tool that central banks really have to contain inflation is to hike interest rates. However, there is a growing risk that an aggressive rate hiking cycle will result in slowing growth. So, what does a central bank do? Attack inflation by hiking rates, but only to slow growth? Yes, at least that’s what the Fed is currently doing. So, it is most likely the ECB will follow suit.
The y/y inflation rate for the Eurozone currently sits at 7.5% vs the 6.6% forecast for April 1. The m/m rate is at 2.5% vs 1.9% expected. With energy prices surging on top of the supply chain issues then inflation needs to be tackled. If the stimulus is kept then inflation could be made worse. The pressure is on for the ECB to cut back and move to hike rates this year.
Russia/Ukraine risk & slowing growth
The Russia/Ukraine crisis is a huge risk to the eurozone and the euro plummeted as the conflict broke out.
So, the one area to watch over the meeting is that the risk of the crisis is seen as slowing down the reduction in stimulus. If the ECB act decisively on inflation then they risk halting the rebound from the pandemic recovery. The ECB is stuck between a rock and a hard place. However, the Fed is moving very aggressively higher and that will give the ECB permission to start hinting at a 2022 rate hike. Inflation is a threat that the ECB will not be able to ignore. The recent talk from the ECB is that most board members are on track to end asset purchases this summer and raise rates by year-end. However, if we see inflation edging higher after the ECB meeting that December rate hike could move forward. Here is a helpful crib sheet from ING economics to look at.
EURGBP longs could be a great trade post the ECB
The best trade here would be if the ECB act decisively on inflation and play down slowing eurozone growth. The BoE is more tentative about their hiking progress, so a firm line from the BoE could lift the EURGBP. However, this trade outlook would need to see confirmation from the ECB at Thursday’s rate meeting this week. A hawkish ECB should lift the EURGBP pair.