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ECB to Gather Amid Growing Dissonance Over Rate Trajectory

(Bloomberg) -- When the European Central Bank sets interest rates on Thursday, attention will be on the increasingly acrimonious path that lies ahead.

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Despite its insistence on decisions being taken “meeting by meeting,” investors have grown accustomed to getting a preview of where borrowing costs are likely to head in the ensuing weeks and even months.

But with officials bickering over how much guidance is appropriate and what measure of inflation they should focus on, providing a clear message will prove trickier than at any point in what’s already the most forceful bout of monetary tightening of the euro era.

The collapse of US bank SVB adds another element of uncertainty and has pushed down investor bets on how high rate will rise.

So far, European officials don’t see contagion risks. French Finance Minister Bruno Le Maire on Monday described the situation in the US as “unique,” highlighting the lender’s ties to the tech sector, which is much smaller in Europe.

But money markets are pricing a lower peak in the ECB’s deposit rate of below 3.75% for the first time in almost a month. They’re also a little less sure about this week’s planned half-point hike, though that move is still widely expected after February’s dire reading for euro-zone underlying inflation.

Even before SVB blew up, tensions among rival factions within the 26-member Governing Council over the path beyond March were spilling out into the open. After Austria’s Robert Holzmann last week urged four more hefty rate rises, Italian central bank chief Ignazio Visco slammed colleagues advocating “prolonged” increases.

Such public sparring throws into question whether ECB policymakers can present a “unified picture” of their monetary-policy roadmap, warns Joerg Angele, an economist at Bantleon in Zurich.

“While the hawks keep calling for new interest-rate hikes with reference to the core inflation rate, the doves are now increasingly speaking out and calling for a cautious approach,” he said.

Fresh gross domestic product and inflation projections through 2025, also due Thursday, probably won’t settle that debate.

Analysts polled by Bloomberg see forecasts for headline price gains being lowered from last quarter’s outlook after a plunge in energy costs. The path for core inflation, though, may be revised higher — at least in the near term.

That risks intensifying a debate that was already underway in February, according to an account of that month’s gathering. Officials discussed how much weight to place on the underlying gauge, with one argument being that “some elements of core inflation could move quite quickly.”

Such uncertainty is reflected in analysts’ views of how far the ECB must tighten.

The median estimate in a Bloomberg poll this month was for a 3.75% peak in the deposit rate — up from 2.5% now — with three quarter-point steps to follow the upcoming bigger move.

“Given we know what’s going to happen this week, of course we’re all looking for signals on May,” said Karsten Junius, chief economist at Bank J Safra Sarasin. “But the Governing Council should resist the temptation to tell us what’s going to happen, because two months is a long time. We’ll have two more inflation readings by then.”

Resilient European output could slow the moderation in those figures. Jobs markets have held up especially well, pushing labor unions to seek double-digit pay boosts that would compensate lost purchasing power.

For Ulrike Kastens, an economist at asset manager DWS, such signals — alongside the worrying data on underlying prices — mean the ECB must “give a hawkish message that it takes the inflation problem seriously.”

What Bloomberg Economics Says...

“The hawks will probably push for some form of guidance that another half-point hike will come in May and we expect President Christine Lagarde to indicate that a further significant increase in rates is likely to be needed, although all decisions will remain data dependent.”

—David Powell and Maeva Cousin. For full preview, click here

Conveying its stance without causing unwanted gyrations in financial markets — particularly as SVB’s fall reshapes expectations for the Federal Reserve’s monetary tightening — may still prove difficult. Investors have been quick to reassess their wagers in recent weeks after a barrage of comments from officials.

The waters could become particularly muddied if ECB hawks are unable to ensure some kind of commitment to another half-point rate move at the next meeting, according to Jussi Hiljanen, SEB’s head of European macro and fixed-income research.

“It will be a massive challenge, especially if the press release is less explicit on signaling 50 basis points for May,” he said. In such a case, striking the right balance “will be a daunting task” for Lagarde.

--With assistance from Harumi Ichikura and James Hirai.

(Updates with market bets shifting starting in fourth paragraph.)

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