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Jan 24 - 02:55 PM

Credit Agricole: Expecting a Slightly Hawkish Surprise from Next Week's ECB Meeting

By eFXdata  —  Jan 24 - 01:30 PM

Synopsis:

Credit Agricole anticipates that next week’s ECB meeting will deliver a 25bp rate cut, consistent with market expectations. However, potential divergence among policymakers on the nominal neutral rate (r*) could lead to a slightly hawkish surprise in the central bank's guidance.

Key Points:

  1. Baseline Expectations:

    • The ECB is widely expected to cut all policy rates by 25bp at the January meeting.
    • Policymakers are likely to signal further rate reductions in the coming months.
  2. Diverging Views on Neutral Rate (r):*

    • There is uncertainty among Governing Council members regarding the neutral rate's level.
    • Dovish policymakers estimate r* at around 2% or lower, advocating for a more aggressive easing path.
    • Less dovish members see r* closer to 2.25%, supporting a more cautious approach.
  3. Potential Slight Hawkish Surprise:

    • If the less dovish view (2.25% r*) dominates the ECB’s outlook, the rate guidance may appear less aggressive than expected.
    • This could signal a shorter or shallower easing cycle, surprising markets positioned for extended rate cuts.

Conclusion:

While a 25bp rate cut is the likely outcome, any emphasis on a higher r* and a more cautious easing trajectory could deliver a slightly hawkish surprise next week. Markets should closely monitor the tone of the ECB’s forward guidance for clues on the Governing Council’s broader policy stance.

Source:
Crédit Agricole Research/Market Commentary

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