Intesa Sanpaolo: The ECB has raised its three official rates by 75bps, as expected, signaling that more hikes will follow. However, a quickly deteriorating economic outlook may soon force the ECB to slow down the pace of the tightening.
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Weekly Economic Monitor – 28 October 2022
Intesa Sanpaolo – Research Department
Action on the TLTRO program was also taken, as expected: as of 11/23/11, banks will pay the current DFR or refi, depending on whether they hit the benchmark or not, which will raise the incentive to repay earlier. Less expected, but largely irrelevant for monetary policy, was the reduction in the rate applied to the reserve requirement, now pegged to the DFR instead of the rate on MROs.
FOMC: another 75bps hike coming and a new, less automatic, phase for the pace of monetary tightening. The FOMC meeting in early November is expected to end with fed funds up 75bps to 3.75-4%. The commitment to bring inflation under control will remain central, but the press conference is expected to prepare for a new phase of the monetary cycle, which will have to calibrate the hikes by assessing the effects of already implemented restriction and the risks, now more balanced, between insufficient and excessive tightening. The FOMC is expected to leave open the outcome of the December meeting, with the possibility of rates rising by 50 or 75bps.
Italy : the programmatic speech of the new Prime Minister Giorgia Meloni marked a moderate discontinuity with the previous executive, using ’soft‘ tones on the subject of confrontation with the EU, changes to the NRRP, accommodative fiscal policies.
The week’s market movers
In the euro area, Q3 GDP data should see growth slowing to a modest pace in Italy and the euro area as a whole. Preliminary October data should see an acceleration of inflation in the Eurozone, to 10.9%. Also on the calendar are September employment data in the Eurozone and October employment data in Germany, as well as September French industrial production and German industrial orders.
The week’s agenda in the United States is packed with data and events crucial to the economic picture. The FOMC meeting is expected to end with the fourth consecutive 75bps hike and fed funds at 4%. The focus will be on Powell’s press conference, which is expected to open a „calibration“ phase for the hikes, preparing for a future slowdown in the pace of tightening without changing the commitment to bring inflation under control. On the data front, the employment report is expected to show employment rising, but at a smaller pace than in previous months. The unemployment rate is forecast up marginally to 3.6%. The October ISM indexes are expected to correct, signaling weakening growth but still remaining in expansionary territory.
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