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ETHENEA commentary ahead of ECB interest rate decision: deposit rate likely to rise to 4,5% in July

Volker Schmidt looks beyond the ECB’s next interest rate decision on 16 March 2023 and analyses the likely inflation trend.

"The European Central Bank (ECB) has clearly communicated that it will also raise its key interest rates by 50 basis points in March. But what will happen afterwards at the meetings in May, June, and July? Holzmann, Austria's representative on the ECB's Executive Board, who is known as a proponent of tough restrictive measures, recently expressed the view that he would continue with further 50 basis points hikes on these occasions as well.

Only above a deposit rate of 4% would the ECB´s policy have a restrictive effect on inflation. And the inflation trend in February was worrying, with an annual increase of 8.5%. With the interest rate decision on 16 March 2023, the ECB will also publish its new inflation forecast. What is clear is that the reported inflation will fall significantly in March 2023. After all, a year ago, in March 2022, petrol and diesel prices had risen to more than EUR 2 per litre and are currently well below that. According to ETHENEA´s portfolio management calculations, 6% inflation is possible in March 2023.

Looking ahead at the expected evolution of inflation in the coming months, we see that a lower inflation rate of around 4% is likely in September and October 2023. This is because gas prices exploded on the wholesale markets in August 2022 and were subsequently passed on to customers. After October, we expect a further acceleration towards 5%. On this basis, the ECB would actually have to raise deposit rates to 4.5% in July in order to provide a timely pre-emption response.

Moreover, there are many other reasons why the ECB should be cautious: inflation in the eurozone always depends on global developments. If China and Japan continue to expand their growth, this will make it harder for the ECB to keep inflation in check. Moreover, eurozone countries are unlikely to cut spending in 2023; it is only in 2024 that the EU plans to force its member states to do so. Consumers also have plenty of money in their pockets, have savings from the Corona period and little fear for their jobs. This too is a headwind for a rapid decline in inflation. A deposit rate of 4.5% is a good starting point for the ECB to analyse further developments in the autumn and adjust interest rate policy if necessary."