A tug of war between inflation and omicron

Highlights:

• At the December 16 policy meeting we expect the ECB to further reduce its weekly PEPP purchases (to about € 12 bn/ week from € 16 bn/week since the September adjustment) and to reiterate that there will most likely be no rate hike in 2022.
• The worsening of the pandemic situation amid a period of prolonged high inflation creates exceptionally high uncertainty on the further course of monetary policy. The ECB needs to be prepared for various contingencies.
• In our base case we expect the PEPP total envelope of € 1.85 tr to remain unchanged and APP to continue to run at €20bn per month through 2022. The means not exhausted until March will be used to smooth the exit from monetary policy emergency flexibly until the end of next year. We continue to see the first rate hike in 2024 but acknowledge that the risks of a hike already in 2023 have increased as of late.

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