3 things to look for at Thursday’s ECB meeting

The European Central Bank (ECB) meeting is due in two days, and the Governing Council faces a daunting task. Events in the US banking system, where two regional banks collapsed, will affect the ECB’s decision and communication.

Fears of contagion to Europe mount. After the two banks in the US collapsed, the Federal Reserve and the US Treasury intervened. However, investors sold shares of other banks, and they did so in Europe too.

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The memory of the 2008 Great Financial Crisis still lingers. If the contagion spreads, the risk-off sentiment will impact all markets, not only the one from where the crisis originated.

Ahead of Thursday’s meeting, investors focus on what the ECB will do with the interest rates, what it believes about the economic growth outlook and the future inflation path.

Interest rates

ECB sets three interest rates for the euro area: the rate on the deposit facility, the one on the marginal lending facility, and the interest rate on the main refinancing operations.

At the only ECB meeting in 2023, the ECB raised all three key interest rates by 50bp. Historically, it is a huge move as inflation grips the old continent’s economies.

Investors expect the ECB to deliver another 50bp rate hike at this week’s meeting – according to the Governing Councils members’ recent guidance.

But the risk is that some dovish commentary, such as a worsening economic outlook, will accompany the rate hike.

Growth outlook

The downside risk is that the ECB expects a longer-lasting economic slowdown. Growth has been anemic recently, as the war in Ukraine affects economic performance. Moreover, with the recent events in the US banking sector, it is unlikely that the ECB will see an improved outlook as risks have increased.

Inflation outlook

Finally, the inflation outlook matters for price stability. In January, inflation in the euro area reached 8.6%, fluctuating wildly across nations.

The Final CPY YoY data is due on Friday – one day after the March ECB meeting. If the ECB sees the risks to the inflation outlook as more balanced, the market might interpret it as getting closer to the terminal rate.