ECB REACT: Lagarde Drops Rate Steer, Hike in 2022 Is Coming (1)
By David Powell (Economist) and Maeva Cousin (Economist)
(Bloomberg Economics) — OUR TAKE: European Central Bank President Christine Lagarde was less dovish in her press conference Thursday than we had expected. As a result, Bloomberg Economics has brought forward its forecast for an interest rate increase by six months to December 2022. The Governing Council seems poised to change its messaging significantly at the March meeting, when the next round of economic projections will be published.
In contrast to her remarks in December, Lagarde refrained from saying the ECB won’t raise interest rates this year.
The Governing Council indicated increased concern about upside risks to inflation in the monetary policy statement.
The ECB left the parameters of its bond buying programs, main policy rates and forward guidance unchanged, as widely expected.
Rate Hike Coming
Lagarde refrained twice from repeating her view from December that interest rates will not be raised in 2022. In the final month of 2021 she said, “It is very unlikely that we will raise interest rates in the year 2022.”
We think that’s significant, leading us to change our interest rate call. Our view is now that the Governing Council will raise the deposit rate by 25 basis points to -0.25% in December 2022. That’s consistent with what’s currently priced in by money markets.
Lagarde repeatedly emphasized that the March forecast round would provide an opportunity for the Governing Council to reassess its entire outlook. A broad re-set of monetary policy may be set out next month.
The asset purchase path may remain the same. The ECB has committed to buying through the Asset Purchase Programme at 40 billion euros a month in 2Q, 30 billion euros a month in 3Q and 20 billion euros a month thereafter. In the event of a hike in December, those purchases would probably be tapered in 4Q. However, the risk is that the ECB announces in March a more accelerated winding down of new net purchases.
Risk Assessment
The Governing Council ratcheted up its concern about inflation in the risk assessment section of the monetary policy statement. It wrote, “Compared with our expectations in December, risks to the inflation outlook are tilted to the upside, particularly in the near term.” 
In addition, the ECB reiterated its words from December in the following sentence. It said, “If price pressures feed through into higher than anticipated wage rises or the economy returns more quickly to full capacity, inflation could turn out to be higher.”
The risks to the GDP growth outlook were again seen as “broadly balanced”. The members of the Governing Council saw, as they did in December, increased consumer spending as an upside risk and the worsening of the pandemic as a source of worry. Geopolitical risks were added to the list of woes as Russian forces intensify their build-up near the border with Ukraine.