Banks Split on Size of Next ECB Hike With Jumbo Step One Option

(Bloomberg) -- Economists are torn over whether the European Central Bank will raise rates by another three quarters of a point at its next meeting in October to get a handle on record inflation as the economic outlook clouds.

Goldman Sachs (NYSE:GS) GS, Nordea, Credit Suisse and BNP Paribas (OTC:BNPQY) BNPQY are among the banks predicting a repeat of Thursday’s historic move when the Governing Council convenes in seven weeks. Others including Morgan Stanley (NYSE:MS) MS see a more moderate half-point hike.

President Christine Lagarde labeled the ECB’s decision this week a “major step” frontloading a shift in monetary policy that will involve further rate increases “over the next several meetings.” Any steps will be “data-dependent and follow a meeting-by-meeting approach,” she said.

Here is a rundown of what banks now predict:

Goldman Sachs

Given the signals from Lagarde’s news conference, “economic conditions point to a rapid tightening at the upcoming meetings.”

“First, the inflation picture has deteriorated further and key inflation metrics are likely to rise more in coming months; Second, measures of underlying inflation pressures have increased further, including wage growth and inflation expectations; Third, we look for other central banks to continue to tighten policy quickly.”

Nordea

“The ECB will seek to catch up after falling behind the recent inflation developments. The central bank continues to have a rather optimistic growth outlook, so it will be interesting to see, if the determination to continue major hikes will prevail as the economy enters recession.”

Credit Suisse

“We expect rates to stay restrictive for a prolonged period. Given the failure of traditional models to forecast the surge in inflation, the ECB will likely want to see evidence of sustained falls in realized (not just forecasted) inflation before reassessing its stance. That’s unlikely before late 2023.”

BNP Paribas

“The fact that the ECB increased interest rates by 75 basis point, the largest increment in its history, is a reflection of the highest inflation rate in its history. Simply put, and to quote the statement, inflation ‘remains far too high.’ What’s more, both the large increment a unanimous decision as well as the language in the press conference send a strong signal of the Governing Council’s determination to return inflation to target.”

Morgan Stanley

“During the press conference, the President stated that the anticipation of the next steps by the ECB as expressed in market pricing was ‘not perfectly accurate, but not a bad market assumption in current conditions.’ While this is clearly a conditional statement, we see it for now as broadly confirming out rate outlook.”

TD

The ECB provided “clear guidance” that “rates would need to rise ‘over the next several meetings’ to bring inflation down to target. This should come as little surprise to anyone, however: at 0.75%, policy clearly needs to rise further from here.”

“Our forecast is for one more hike than President Lagarde suggested at the press conference, but given the meeting-by-meeting nature of the ECB’s decision-making framework, and the ease with which they have eschewed guidance in the past, we’d put little weight on her specific timeline of hikes at this stage.”

Rabobank

“The ECB and markets have continuously underestimated inflationary pressures this year, and it is certainly not a given that the inflation outlook improves sufficiently by year-end. President Lagarde admitted that ‘we’re so far away from a rate that will get inflation to 2%,’ suggesting that the ECB may have no choice but to continue tightening policy next year, even if the economy falls into recession as we expect. Though this is admittedly splitting hairs, the ECB arguably assumes as much: Lagarde stressed that the Council expects to hike at the next several meetings.”

Barclays (LON:BARC) BARC

The ECB issued “quite a hawkish statement in our view, as it states the need to generate a decrease in demand to curb price pressures. However, it needs to be read in the context of the ECB’s baseline growth forecasts which does not include a contraction in real GDP, as in our forecasts. In our view, the baseline growth path is optimistic: the persistent and elevated inflation and the increase in gas prices and energy bills for firms is already having a contractionary effect on consumption and investment. Also, the new forecasts do not incorporate the Russia’s decision announced after the cut-off date to suspend gas flows via NS1 indefinitely, nor the downward revisions to August services PMIs showing a contraction.”