European Central Bank: Hawkish forecasts point to higher terminal rate

European Central Bank: Hawkish forecasts point to higher terminal rate – Nomura

Current Depo Rate

2.25%

The ECB's current deposit rate after a 25bp hike.

Projected Terminal Rate

3.00%

Expected depo rate by March 2027 after three additional hikes.

Core HICP Inflation Above Target

0.2pp

Projected average core HICP inflation above target for 2028.

§ 01 Executive Snapshot

What: The European Central Bank (ECB) raised its depo rate by 25 basis points to 2.25% and issued more hawkish forecasts than previously expected.
Who: Nomura’s European Economics team, led by Andrzej Szczepaniak, and ECB President Christine Lagarde.
Why it matters: The ECB's hawkish outlook indicates a potential tightening of monetary policy, which could impact economic growth and inflation expectations in the Eurozone.

The ECB raised the depo rate to 2.25% with a forecast for three further 25bp hikes by March 2027, raising the terminal rate expectation to 3.00%.
The ECB has adjusted its GDP growth forecasts, now expecting a smaller impact from the Iran war compared to previous estimates.
Core HICP inflation projections have been revised upwards, with expectations to average 0.2pp above target in 2028, even with three rate hikes.

Historically, the ECB has maintained a cautious approach to rate hikes, often balancing inflation concerns with economic growth.
The new hawkish forecasts indicate a significant shift in the ECB's stance, suggesting confidence in economic resilience despite geopolitical tensions.

Immediate implications include a higher likelihood of rate increases, which could influence borrowing costs and consumer spending in the Eurozone.
Long-term, sustained inflation above target could necessitate further tightening, impacting investment and growth strategies in the region.

Potential risks include economic slowdown due to aggressive rate hikes, which could stem from external shocks or domestic economic performance.
Competition from other central banks adopting different monetary policies could also impact the effectiveness of ECB's measures.

Upcoming ECB meetings in September and December 2023 will be critical to assess the trajectory of rate hikes.
Monitoring inflation data and GDP growth forecasts will signal the success or failure of the ECB's revised outlook and policy adjustments.

§ 07

What recent action did the European Central Bank take regarding interest rates?

The European Central Bank raised its depo rate by 25 basis points to 2.25%.

Why is the ECB's hawkish outlook significant?

It indicates a potential tightening of monetary policy, which could impact economic growth and inflation expectations in the Eurozone.

How many further rate hikes does the ECB forecast by March 2027?

The ECB forecasts three further 25 basis point hikes, raising the terminal rate expectation to 3.00%.

When are the upcoming ECB meetings that will be critical for assessing rate hikes?

The upcoming ECB meetings are scheduled for September and December 2023.