(Finance) – S&P Global Ratings thinks the ECB will start to prepare the markets for a normalization of monetary policy as early as March, although we will have to keep an eye on some variables until the decisive meeting: inflation, wages and revisions of growth forecasts. Normalization arises from the fact that i three key ECB criteria may soon be met: short-term inflation should be on target at 2%; medium-term inflation (over a three-year forecast horizon) should remain in line with the target; core inflation is expected to sustainably move towards 2%, well before the end of the five-year projection horizon.
For now, the Pandemic Emergency Purchase Program (PEPP) is expected to stop in March and the Asset Purchase Program (APP) will be increased to € 40 billion in net purchases at the beginning of the second quarter, before being reduced by 10 billion. billions of euros every quarter. “Given this sequence, it seems difficult for the ECB to put an end to net APP purchases before the start of the fourth quarterwhich could pave the way for a first rate hike at the end of the fourth quarter – A note from the rating agency reads – In December, the ECB will also receive the first projections from ECB experts for 2025, which could help assess whether medium-term inflation prospects remain in line with the target “.
As for the liftoff, or the rate hike, S&P expects the European central bank to start raising the deposit rate to -0.25% from the current level of -0.5%. This would restore the 25 basis point gaps between its three policy rates (the deposit rate, the lending rate, and the marginal lending rate). “Thereafter, the ECB can raise the three rates by 25 basis points in tandem, on a quarterly basis, if wage and growth data remain on track,” he stressed.
Although the path to normalization of rates is relatively clear, according to experts there is still a lot uncertainty about the ECB’s plans to scale back its balance sheet, as it has not faced this challenge in the past. Also, according to S&P, the stock of bonds held by the central bank exerts more downward pressure on yields than the flow of net purchases. “With the PEPP reinvestments ending in 2024 and the average maturity of the ECB’s portfolio holdings at just over seven years, the passive budgetary normalization could continue until 2031 – reads – It could take even longer if the ECB decides to continue reinvesting the APP for longer than the PEPP “.