I wrote about the dangers of central bank groupthink yesterday and the assendant global theme right now was best summarized by the ECB's Schnable at Jackson Hole:

"Even if we enter a recession, we have little choice but to continue the normalization path ... If there was a de-anchoring of inflation expectations, the effect on the economy would be even worse."

That commentary and similar statements from others convinced economists at Deutsche Bank to make three changes to their ECB call.

The first is raising their call on the terminal rate to 2.50% from 2.00%. Second is eliminating a late-2022 rate-hiking pause at 1.00%, with the top now coming in April as hiking continues. Finally, they anticipate a 75 bps hike on Thursday from 50 bps previously.

"Two things tip the balance towards a larger hike. One is the upside surprise on the flash August HICP print, repeating a pattern and ensuring a large upgrading of ECB staff inflation forecastsin September. The other is the significant minority of Governing Council members asking for a 75bp hike to be on the table. With concerns rising about persistent inflation and rates likely to remain below neutral even after a 75bp hike, the hawkish camp has the momentum."

They note however that it's a close call and specfically cite Lane, Villeroy and Rehn speaking in favor of an 'orderly' or 'steady' pace of hikes.

Arguments in favor of 50 bps include:

  • Avoiding a sense of panic
  • Inflation data no worse than July
  • Upstream price pressures peaking
  • Inflation expectations stabilizing
  • Inevitable recession
  • Electricity market intervention
  • Italian political uncertainty

Arguments in favor of 75 bps:

  • July's 50 bps hike didn't break anything
  • Need to catch up
  • Expeditious return to neutral
  • Household inflation expectations at a new high
  • ECB sensitivity to exchange rates
  • Financial conditions not conclusively tight
  • Feared second round effects
  • Actual vs projected inflation forecast misses

One thing they will also be focused on is a 'substantial' downgrade of the 2023 GDP forecast with Deutche Bank anticipating a forecast of +1.0% growth versus their own forecast of -0.3%.

ECB forecast expectations