The ECB preview Oct 2022 - is the ECB dreaming or...?

Risky week for the Euro

The Skilling EUR / USD CFD product allows traders to speculate on European Central Bank (ECB) events

Upcoming Event - Thursday, October 27, 2022

• European Central Bank (ECB) Interest Rate Decision
• Governing Council of the European Central Bank (ECB): Monetary Policy Meeting in Frankfurt Germany

Is the ECB dreaming or do they know more than what markets are pricing in?

• The ECB expects a decline in energy-related inflation throughout 2023 and 2024, assuming that oil and gas prices fall
• The ECB also expects food inflation to moderate

What about employee compensation and the high inflation dilemma?

• The ECB is forecasting that compensation for employees will grow by 4% in 2022, and 4.8% in 2023 before falling back to 4% in 2024
• The growth in unit labour cost is expected to significantly contribute to 2023 inflation but not so much in 2024

In a perfect world, wage growth and inflation would be in balance, but then again, would that be a perfect world for traders and the financial markets?

For the moment the ECB is expecting to see an increase in wage growth between 2022 and 2023, plus they see a robust labour market across the EU and increases in minimum wages in most EU countries. Maybe not perfect, but not such a bad outlook in any event. Just don’t forget to ask your boss for that raise.

What is quantitative tightening and what is the risk for the ECB if they get it wrong

QT (Quantitative Tightening) is also known as “balance sheet normalization” which happens when a central bank applies measures that decrease the “money supply” in the economy. During periods of high inflation a central bank can use various tools, including raising interest rates as a method to take “excess liquidity” out of the economy in hopes that by having less money in the system prices will start to normalize.

QT is when a central bank allows banks to deposit “assets” such as bonds in return for euros at ultra-low rates which these banks can then loan out to their banking customers. This move helps to stimulate economies by adding “liquidity” into the system. This side effect is the potential for higher inflation.

What happened in 2014?

• The ECB started an asset purchase program with the aim to increase the money supply in the EU as a tool to stimulate economic growth. It worked, as EU unemployment decreased and the EU economy managed to grow.

Now that higher inflation is a problem, hiking rates alone might not be enough to achieve the price stability the ECB is seeking.

• On June 9th, 2022 the ECB governing council decided to discontinue new asset purchases

The big risk for the Euro

ECB president Mrs. Chistine Lagarde has previously indicated that QT may begin again once “policy rates normalized”. While there is no official “normal rate” or neutral rate, some ECB policymakers have alluded to the 2% mark, which just happens to be the rate level expected for Thursday, October 27, 2022

Bottom line: Nothing could be off the table, so the ECB might make some kind of QT announcement this week which could imply that the ECB may be looking to slow down hiking interest rates around the 2% mark.

Even though inflation remains at unacceptable high levels, and with additional QT such as reducing the asset purchase program, this may help take out some of the excess money from the system without hurting those who have borrowed at low rates during the previous years.

The October ECB monetary policy meeting is a dice roll that may or may not trip up euro FX traders. Good luck and trade safe.