🏦🇪🇺Cable FX Macro Weekly Note: ECB February Rate Decision

**As seen in Risk In The Week report 01/27/23, cablefxm.co.uk/reports

The ECB lifted its main refinancing rate by 50bps to 2.50%, the deposit rate was taken to 2.0%, the moves were in line with market expectations. The central bank stated it was necessary to keep raising rates, while it flagged that the APP was set to decline at a measured and predictable pace from March on. On inflation, the ECB revised the 2023 forecast to 6.3% from the prior 5.5%, the 2024 projection is seen at 3.4% vs a prior 2.3%, the forecasts' horizon do not see inflation falling back to the ECB’s target. On the APP, the central bank signaled this would fall by average EUR15 billion/month during Q2, the board is set to announce more details on the parameters of the programme during the February meeting. On growth, the ECB said that the economy would fall during both Q4 and Q1, but flagged that a recession is expected to be short-lived and shallow. Over the presser, Madame Lagarde said inflation risks to be primarily to the upside, while it signaled that a period of 50bps hikes should be expected. Something of new information for markets was when Lagarde said that the ECB should do more on rates than what the market priced in, she noted that market rate bets don’t allow the ECB to reach its 2% price target. Lastly, ECB sources made it clear that more than a third of officials opted for a 75bps rate hike.

Market pricing was pushed higher on the event, however, it has ranged since late December. Market prices in about 140 basis points of additional tightening. Analysts at ABN AMRO revised their 2023 inflation forecast lower to 4.5% and see core prices falling towards 2% during 2H 2024, they expect the ECB to lift by 50bps this week followed by two steps of 25bps.