OPINION
Market Rating Before FOMC MeetingJan 31
Tone of ECB Communication likely to be a Cautious One
The European Central Bank (ECB) will publish its decision after the first monetary policy meeting of the year tomorrow at 14:45 (GMT+2).
In December meeting, the ECB Governing Council decided to keep the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility unchanged at 0.00%, 0.25% and -0.50% respectively. The Council also expected to conduct net asset purchases under the PEPP at a lower pace than in the previous quarter and discontinue net asset purchases under the PEPP at the end of March 2022.
While developed countries on the North American continent have turned to a tightening policy stance to control inflation and inflation expectations, the European Central Bank is moving forward on a relatively different story.
At this point, the US Federal Reserve, which has the world's most important reserve currency, indicated that it will complete its asset purchases in early March and that the balance sheet reduction will be started after the process of increasing the funds rate range begins. However, the ECB resolutely maintains its prediction that inflationary pressures will be relatively low and will ease by the second half of the year. According to EuroStat, consumer price index (CPI) in the Eurozone increased by 0.4 percent in December compared to the previous month and registered as 5.0 percent year-over-year.
On the other hand, in the Eurozone, which is the center of the Omicron variant, economic activity is quite strong, despite the measures taken against the variant. According to EuroStat, gross domestic product (GDP) in the region grew by 0.3 percent in the last quarter of 2021 compared to the previous quarter and by 4.6 percent year-over-year. As a matter of fact, the unemployment rate in the region also fell to a record low with 7.0 percent in December.
To sum up, in the meeting to be held on Thursday, the ECB is not expected to make any updates in the monetary policy instruments in order to monitor inflation indicators for a while without risking the growth outlook.
However, the main challenge that the Bank will face will be inflation projections. Regarding these, we believe that ECB President Christine Lagarde will try to control inflation expectations priced in the debt instruments market by using a cautious tone in the press conference. In addition, although the ECB will end the pandemic incentives later than the North American central banks, Lagarde is likely to say that net purchases under the APP will be completed by the end of the year and thus the first rate hike will be in 2023.
