By Hans Bentzien
FRANKFURT (Dow Jones) — Berenberg chief economist Holger Schmieding assumes that the discussions in the Governing Council of the European Central Bank (ECB) this week after the monetary policy decisions and the communication from the US central bank will be even more controversial than before. According to Schmieding, four questions are the focus of interest:
1. ECB President Christine Lagarde in some way puts into perspective her December comment that a rate hike in 2022 is “very unlikely” by, for example, emphasizing the uncertainty surrounding the inflation outlook so much that markets may interpret it to opens the door a bit for a rate hike at the end of 2022? “We consider such a change in rhetoric to be ‘very unlikely’, to use the words of the ECB President,” says Schmieding.
2. In response to the internal dispute over the medium-term outlook, will the ECB make any changes to its assessment of the largely “temporary” nature of the current rise in inflation?
3. Will the ECB describe the roughly 35 basis point rise in 10-year bond yields since its December meeting as an unwelcome deterioration in financing conditions due to spillovers from the US, or as a normal reflection of an ongoing nominal GDP recovery? “In our view, the ECB could emphasize that it is willing to use the flexibility of its asset purchase program to contain excessive fluctuations in yields,” says Schmieding. “However, we do not expect the ECB to suggest that it might increase its bond purchases to prevent a further orderly rise in yields.”
4. Is the ECB making good on its December promise to “review the appropriate calibration” of its two-tier system of deposit rates? The more liquidity the ECB pumps into the system by expanding its balance sheet, the greater the burden that the negative deposit rate will have means for the banks.”In our view, raising the threshold for sanction-free bank deposits at the ECB is long overdue,” says Schmieding. “We assume that the ECB will ultimately ease the pain for the banks. But we wouldn’t bet on the ECB doing that this Thursday just yet.”
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DJG/hab/apo
(END) Dow Jones Newswires
February 01, 2022 03:05 ET (08:05 GMT)