ECB is gradually shifting towards a September rate hike
The European Central Bank's (ECB) recent minutes suggest a gradual shift towards a potential rate hike in September, as highlighted by their increased concern over inflation risks and improved macroeconomic indicators. Per the full note from ing-think, several ECB members advocated for a rate hike at the July meeting, which, although no immediate change was made, indicates a growing consensus on tightening monetary policy. This aligns with recent reports of resilient economic activity, despite ongoing uncertainty. The markets should keep an eye on upcoming economic indicators that could influence this potential shift in policy.
What the desk is arguing
The desk posits that the ECB is setting the stage for a September rate hike, gradually acknowledging improving economic conditions as elucidated in the July meeting minutes. Per the full note from ing-think, the ECB's decision to maintain rates has not precluded discussions among its members about the necessity for future tightening, reflecting a nuanced approach to combatting inflation.
Key statements from the minutes underscore this shift, with members expressing a cautious but vigilant approach to rising inflation risks, suggesting a more hawkish stance could emerge. Specifically, officials noted that downside risks to growth are appearing less pronounced, reflecting a bullish sentiment within the ECB regarding current inflation dynamics.
Where it sits in our coverage
The current institutional consensus for the EUR/USD pair is centered around 1.075, with a range from 1.04 to 1.12, as reflected in the following firms' forecasts:
This positions our outlook for a potential ECB rate hike slightly above bofa's more dovish stance on the Euro, suggesting we align more with the upward bias seen from jpmorgan.
How other firms see it
Firms such as jpmorgan and db appear to be forecasting an imminent tightening from the ECB, aligning with our desk's view of a likely shift by September. Conversely, bofa holds a more cautious stance, downplaying the likelihood of a significant rate adjustment in the near term.
Currency pairs such as EUR/USD and EUR/GBP will be critical to watch as the ECB navigates this complex economic landscape, especially in light of global inflation trends and energy price fluctuations.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01The ECB is increasingly signaling the possibility of a September rate hike.
- 02Members are concerned about rising inflation risks, despite previous caution.
- 03Better-than-expected economic indicators are reducing downside growth risks.
- 04The unfolding situation will impact EUR/USD positioning significantly.
Market implications
Traders should monitor the EUR/USD pair closely around 1.075, particularly for any signs of a shift in ECB rhetoric or data releases that could solidify the rate hike narrative. Positioning ahead of any major economic indicators may prove vital.
Risks to this view
The primary risk to this bullish call hinges on a sudden deterioration in economic indicators, which could dampen the ECB's rate hike plans. Any resurgence in downside surprises from growth or inflation data could result in a recalibration of market expectations.
Older quick take Quick take Published 13:00 ECB is gradually shifting towards a September rate hike The minutes of the ECB’s July meeting suggest that the ECB is still struggling with how to react to a textbook supply-side shock. However, the number of ECB members supportive of a September rate hike seems to be high ECB President Christine Lagarde at the central bank's press conference last month Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Carsten Brzeski Global Head of Macro At its July meeting, the ECB left interest rates unchanged. Nevertheless, President Christine Lagarde revealed that some ECB members had argued in favour of a rate hike, even though they ultimately backed the decision to stay on hold.
That was an important signal that the ECB was edging closer to further tightening. The just-released minutes of the July meeting not only shed more light on that debate but, together with recent macroeconomic developments, strengthen the case for a September rate hike. Here are the most important statements from the minutes: Still high uncertainty but growing awareness of resilience. “Against this background, members assessed that the outlook for activity remained surrounded by high uncertainty.
Incoming information had been better than expected, and downside risks to growth were judged to have become less pronounced, as confidence indicators had continued to recover.” Inflation risks still tilted to the upside. “The incoming data since the June meeting were seen as containing both reassuring elements and reasons for continued vigilance and caution, although the risks to inflation remained to the upside.” Gas prices could become the next price shock. “It was noted that one of the reasons gas prices had such an inflationary impact in 2022, aside from their larger increase than in the current situation, was the role of gas as the marginal factor for electricity production at that time.” Still no signs of a second-round effect from higher energy prices. “Members noted that underlying price pressures had continued to moderate and that more persistent inflation components had evolved more favourably than expected… Members also considered that the easing in services inflation could be a sign that indirect effects in the travel sector had not materialised to the extent expected. This might be evidence of resistance to price increases, as airlines had faced a reduction in demand when attempting to raise prices… Overall, moderating wage growth, anchored medium and longer-term inflation expectations, stable profit margins and the limited scale of the impact of fiscal policy on aggregate demand supported the assessment that second-round effects of energy price shocks had not yet become embedded in domestic price and wage dynamics.” And no evidence of a de-anchoring of inflation expectations. “Inflation expectations were assessed as anchored over longer horizons.” Arguments against rate hikes. “Moreover, there had been little evidence of second-round effects materialising. Since staff analysis attributed the increase in inflation so far almost entirely to energy supply developments, with virtually no contribution from aggregate demand or fiscal policy, unlike in the case of the 2021-22 inflation surge, it was argued that a rate increase would not address the underlying cause of the rise in inflation.” Not everyone agreed. “Some members noted that, as the incoming data since the June Governing Council meeting had underlined the case for further policy tightening, they would not have opposed raising rates at the current meeting…These members stressed the low likelihood of a situation in which a further rate hike would not be warranted….There was some evidence that acting earlier could at times be less costly and lowered the risk of falling behind the curve.
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