SocGen: The ECB Is Targeting Real Interest Rates And This Tightening Cycle Will Be Big

If you think this ECB tightening cycle is going to be short-lived, think again, according to Societe Generale's Klaus Bader.

Bader notes that this tightening cycle isn't just about adressing the nominal interest rate throughout the eurozone, rather, it's about adressing the real rate that ECB governing council members have been talking about (that's the nominal interest rate, minus the inflation rate).

From Klaus Bader:

The question is what, if anything, the history of such a forward-looking real rate perspective suggests about where the ECB rate may be heading in this cycle – and a cycle is certainly what we and pretty much everyone else expects, regardless of Mr Trichet’s protestations that a likely April hike is not part of a plan of a series of hikes. Real rates confirm that current levels are unprecedented (Chart 3), and a 25bp or even 50bp hike is unlikely to achieve anything like a meaningful step towards the desired normalisation.

If the ECB is targeting real rates, we should expect some pretty substantial hikes from where we are now.

From Klaus Bader:

Ergo, if we are right in believing that the ECB wants to return to moderately positive rates, which would still be accommodative, similar to 2003-05, this would suggest a nominal interest rate in a range of 2.0-2.5%. A more neutral stance would imply nominal rates around 3%. Hence, we are reasonably comfortable with our forecast that the cycle for ECB rates is likely to extend to 2.5% before a pause can be expected.

To put that in perspective, the ECB rate stands at 1.0%. So, we're looking at a substantial tightening cycle if 3% or even 2.5% are the target.

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From Societe Generale:

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