ECB rates could rise earlier

ECB rates could rise earlier

The euro briefly popped after a report on an internal ECB model that showed rates could rise in two years.

The ECB only forecast 3 years out publicly but internally looks out to 5 years. The report says he revealed that the scenario showed inflation hitting 2% just outside of the forecast window.

Here are the latest public forecasts:

ECB inflation forecasts

So if you draw a line there, it's a pretty big shift in trend back up to 2%. That's not the base-case consensus and it's ethnically dubious that he's revealing that to some German banks.

The flipside is that ECB forecasts have been garbage forever and no one trades on any forecasts 3 years out. But there's clearly now a scenario where the ECB puts out a 2% number in December or in 15 months time and the market has to ratchet higher rates and EUR pricing. We got a taste of that in the euro pop on this report.

To hike, the ECB would likely have to forecast inflation hitting 2% within 18 months and holding there for at least that long, with a bunch of caveats around transitory factors.

The first 2024 forecast is due in December.