European Daily: ECB—Hike or Hold?

Research evidence excerpt

European Daily: ECB—Hike or Hold?

Goldman Sachs European Daily

Exhibit 2: A Simple Taylor Rule to Size the Threshold for Another Hike

Source: Goldman Sachs Global Investment Research

This exercise suggests that our own forecast (in which growth runs 0.2pp ahead of

potential and core inflation is at 2.5% in 2027) would call for 35bp of total tightening—a

weak case for another 25bp hike from here (Exhibit 2).1 Both the staff’s baseline

projections and milder scenario would only call for 15bp of total tightening—implying

reversing some of the 25bp hike delivered to date (as lower inflation in the “milder”

scenario relative to the baseline would be offset by higher growth).2

Second, we explore how changes in the staff projections might affect the policy decision.

To do so, we compute the changes in vintages of the staff projections for growth and

headline inflation in the current and next year, going back to 2000.3 Exhibit 3 shows that

the Council typically hiked the policy rate when the projections for inflation or growth

were revised up. The two instances when the staff revised down the inflation projections

and the Council still hiked are December 2006 (when oil prices fell but growth was

revised up and unemployment continued to decrease) and March 2023 (when energy

prices fell but core inflation data surprised to the upside).

1 We forecast growth of 1.2% in 2027 against our estimate of potential growth of 1%.

2 The ECB staff projects growth of 1.2% and 1.4% in their baseline and milder scenario in 2027, respectively,

against their 2028 projections of 1.4%.

3 The ECB started publishing projections for core inflation in 2013 and started including a two-year ahead

projection horizon in 2014. We also use the midpoint of the projection ranges until 2013.

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