Substantial increases in the European Central Bank’s inflation forecast suggest further rate hikes before any pause.
The ECB remains optimistic as core inflation in the Eurozone remains firm and the labor market is still tight. With weak demand and no sign of overheating labor markets, wages are rising regarding half as fast as in the US or the UK. Substantial increases in the ECB’s inflation forecast suggest further rate hikes before any pause. So we see the benchmark rate hitting 2.75% to 3% at the start of 2023.
Once rates peak, the next logical step in the quantitative tightening (QT) sequence will be for the ECB to gradually taper its asset purchase programs, likely from March onwards at a pace of around 15 billion euros per month. In the meantime, we expect it to continue to flexibly reinvest bonds acquired under the Pandemic Emergency Purchase Program to try to prevent spreads between different sovereign yields.
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