April meeting: No further acceleration of stimulus withdrawal was hinted at by the ECB in April. It confirmed both the previous guidance on QE (likely to end in Q3) and the policy sequence, with interest rates to rise at “some time” after QE ends. The ECB is likely to implement a gradual rate normalisation after the end of QE in an ever more data-dependent environment, given high uncertainty regarding the fallout of the Ukrainian conflict on growth and inflation. Flexibility has been emphasised as a valuable means to preserve the transmission of monetary policy and avoid fragmentation. We expect QE to end in Q3, as announced, followed by rate normalisation, with two hikes before year-end, followed by another in Q1 2023. When compared to markets, we remain in the cautious camp, as our macroeconomic projections attach an higher probability to a technical recession, at least in countries such as Germany and Italy, which are more dependent on energy supply and prices. Inflation is the ECB’s top priority. The Governing Council is more sensitive to the risk of record inflation than to the growth slowdown. The ECB stands ready to act in the event of deteriorating growth prospects. However, we do not expect it to be proactive on this. We expect the ECB to allow government bond yields to rise and spreads to widen before shifting its monetary policy stance. For now, the ECB believes that financing conditions should remain accommodative despite the recent tightening.
ECB strikes a somewhat dovish tone, despite inflation remaining top priority
