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

**As seen in Risk In The Week report 04/28/23, subscribe at

The ECB lifted rates by 50 basis points back in March, the main refi rate is now at 3.50%, the marginal lending rate stands at 3.75%, the deposit facility reads at 3.00%. The move came to prove that the central bank remains focused on the inflation front despite the banking meltdown on both sides of the Atlantic. However, the ECB recognized vulnerabilities in some banks and said that it stood ready to respond on price and financial stability. The board stated that inflation projections remain too high for too long, but refrained from giving forward guidance in rate moves. Over the presser, Lagarde said that the half of a percent move was supported by a ‘very large majority’ and reaffirmed the central bank’s commitment to fight inflation. We received the April preliminary inflation print before the ECB decides on Thursday, the headline CPI stands at 7.0% Y/y, this is 2.2 percentage points lower than where it was at the end of last year and 5.0 percentage points higher than the ECB’s target of less than 2.0%. The median of the economists’ forecasts compiled by Bloomberg pencil prices to rise by 5.6% Y/y in 2023, economists do not see headline inflation falling back into target before 2025. The desk at Morgan Stanley sees the ECB delivering a 25bps rate hike on Thursday, they also see the board bringing back forward guidance. Morgan Stanley expects the ECB peak rate to be reached by July, as they pencil two more 25bps hikes after May. Analysts at J.P. Morgan said that the debate between 25bps and 50bps remains active, they noted that economic data should support a larger move. J.P. Morgan said they have turned tactically long 5Y Germany, and hold tactical shorts in 10Y Italy vs France on the back of stretched valuations and as a risk off hedge.



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