Wells Fargo Expecting ECB to start moving rates in December

Beyond March, analysts at Wells Fargo expect the European Central Bank to start raising its Deposit Rate shortly after it completes its net bond purchases.

An initial 25 bps Deposit Rate hike is expected in December 2022 and another 25 bps hike in March 2023. They consider the divergence between the ECB and the Federal Reserve to weigh on EUR/USD over the medium-term.

Key Quotes:
“Beyond March…, we expect the European Central Bank will take the opportunity to start moving its Deposit Rate away from negative territory by late 2022. Specifically, we now forecast an initial 25 bps Deposit Rate increase to -0.25% at the December 2022 announcement, with another 25 bps hike to 0.00% to follow at the March 2023 announcement. Beyond March next year, we expect the Eurozone economic environment will be one of moderate growth and slowing core CPI inflation, but perhaps still above 2% at that time. Accordingly, we expect the ECB will continue raising interest rates beyond March 2023, though at a reduced pace. Specifically, we also forecast 10 bps Deposit rate increases at each of the June 2023, September 2023 and December 2023 meetings, which would see the Deposit rate end next year at +0.30%.”

“Although we believe the ECB will adjust its interest rate stance more rapidly than we previously forecast, it will lag behind the pace of rate hikes from the Federal Reserve, and also fall slightly short of the pace of ECB rate hikes currently priced in by market participants. Accordingly, we still view this more-timely path for ECB interest rate increases as consistent with moderate weakness in the EUR/USD exchange rate over the medium-term.”