There has been hawkish talk from the ECB, several governing council members supported steps towards a higher neutral rate and a balance-sheet reduction. We now expect another 75 basis points hike from the ECB in October and more rate hikes next spring, barring a deeper recession, for a terminal rate of 3% by mod-2023.
Faster rate hikes also mean that quantitative tightening is now in the agenda, we see ECB starting QT by mid-2023. The balance sheet plays an important role in financial stability (as evident in the U.K.) and avoiding fragmentation, QT options and communication will need to be assessed carefully.
- Société Générale
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