Euro stock markets can still have difficult days in the following weeks.
While the ECB policy meeting and interest rate decision will be held on Thursday, February 2, the Eurozone economy has improved amid a warm winter and sufficient natural gas reserves. However, still, it is far from what it has to be. While improving economic data favor more rate hikes, lowering inflation in recent months can encourage softer decisions. However, that softer decision does not mean going with 25 bps; still, we expect at least a 50 bps rate hike in this meeting.
In December projections, the ECB expects 3.4% inflation in 2024 and 2.3% in 2025. According to this outlook, the ECB sees around 2% inflation in the second half of 2025. The fate of inflation depends on ECB decisions and future economic growth. Suppose the Eurozone economy can recover faster and can heat up again quickly. In that case, higher inflation will stay longer, but with the general view of a mild recession, inflation also can slow down even more. Therefore, the ECB’s headline inflation projections can decrease by 0.3 to 0.5 percentage points for 2024 and 2025.
We expect Mrs. Lagarde, in her press conference after the meeting, to say that the following decisions will be data-dependent. Germany’s economy can avoid a contraction in Q4, while EU headline inflation eased -0.4% in January to bring that annual inflation to 8.5%. However, since we have core inflation unchanged at 5.2% and positive economic data, we still believe the ECB will deliver a 50 bps rate hike as the market expects.
Also, we expect the ECB to emphasize continuing the hawkish policies to ensure inflation expectations do not spiral. With expected decisions, it is likely to see the Euro getting more robust in the short term against its crosses, but stock markets across the Euro can still have difficult days in the following weeks.