🏦❗️Cable FX Macro Weekly Note: ECB March Rate Decision

**As seen in Risk In The Week report 03/11/23, subscribe at cablefxm.co.uk/reports

The ECB raised its policy rate by 50bps in February, the main refinancing rate was lifted to 3.0%, in line with the median expectation. The ECB said that it still had to continue rising rates significantly and at a steady pace. The board signaled that it would be appropriate to hike rates by 50bps again in March, and that it would regularly assess the TLTRO impact on monetary policy. The central bank stated that the APP is set to decline by an average of EUR15 billion per month until the end of the second quarter, and said that the pace beyond this would be determined over time. On the presser, Madame Lagarde said that supply chains were easing, however, she also noted the fact that activity slowed markedly. Lagarde mentioned that risks to the growth outlook have become more balanced and that the ECB sees a more benign inflation projection. Despite the encouraging message, she also said that the bank is not done tightening policy, and it remains focused to bring inflation back to the 2% target. To provide some flexibility to her communication, she said that intention is not 100% commitment, while inflation risks were not symmetric. As of time of writing, inflation expectations for the eurozone have come down sharply. The 5y5y inflation swap forward is now at 2.365%, down from its cycle peak near 2.600% which was seen just earlier this month. The last read in O/N index swaps shows odds of a 50bps hike this week after rate hikes bets were paired, the market is pricing an additional 90bps of hikes by end of the year. This is be significantly lower compared to the prior week, the market was pricing around 150bps of additional tightening by year-end. We have recently heard desks lifting its ECB peak rate forecast, Morgan Stanley pencilled rates reaching 4.0%, up from the prior 3.25% as it sees Eurozone inflation higher for longer. They now expect headliner inflation in the region to rise at 6.0% in 2023 and see core prices at 5.0%. The desk argues that as prices rise at this pace will not let the ECB to scale down its steps of 50bps rate hikes, Morgan Stanley sees another move of this magnitude in May.