ECB’s September minutes reveal full support for 25bp rate hike
The ECB's September meeting minutes indicate unified support for a 25bp rate hike, as inflation expectations deteriorate despite some members expressing concerns about the resilience of the economy. Per the full note from ing-think, the ECB's decision reflects a consensus on the need to address inflation, which is projected to remain above target for an extended period. This decision aligns with broader market expectations, leaving traders in a wait-and-see position as they navigate the implications for EUR crosses, specifically against the USD. As we assess this development, upcoming inflation data may play a crucial role in shaping market sentiment.
What the desk is arguing
The minutes from the ECB's September meeting highlight a solid consensus among members for a rate hike, primarily due to a downgraded inflation forecast. According to the newly-released documentation, the decision to raise the deposit facility rate from 2.25% to 2.50% was deemed necessary to counter an inflation rate that is expected to persist above the central bank's target for a considerable duration, indicating a pro-active rather than reactive stance.
Furthermore, while the ECB expresses confidence in the necessity of the rate hike, it should be noted that some members raised concerns over the long-term impact of the energy price shock, suggesting that the inflation narrative might not be as uniform as presented. This nuanced discussion around inflation risks underscores the unpredictability of economic resilience going forward, especially highlighted by rising energy costs and potential secondary effects on food prices as noted in the minutes.
Where it sits in our coverage
Our current consensus for EUR/USD sits at 1.075, with a range of 1.04 to 1.12, as various firms adjust their forecasts in response to recent ECB developments. Notable targets include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
The desk's positioning reflects a conservative optimism that aligns closely with jpmorgan's slightly elevated stance while being more cautious than bofa, emphasizing the balance between inflation control and economic stability.
How other firms see it
Firms like jpmorgan and others are generally aligned in their view of the ECB's necessity to tackle inflation through rate hikes, underscoring a consistent strategy amid rising price pressures. In contrast, bofa raises a cautionary flag with a more skeptical outlook on the longevity of inflation pressures and economic resilience.
As discussions around inflation intensify, watch closely how the EUR/USD trajectory intersects with U.S. economic indicators, particularly those related to inflation expectations and Federal Reserve monetary policy decisions.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01The ECB’s decision to raise rates was unanimously supported by the Governing Council.
- 02Deteriorating inflation expectations are seen as the main driver for the rate hike.
- 03Some members believe the energy shock's effects on inflation may not be fully realized yet.
- 04Concerns remain about potential food price increases due to higher energy costs.
Market implications
Traders should focus on the EUR/USD levels around 1.075, paying attention to upcoming inflation data as a potential catalyst that could influence both ECB policy and market positioning in the eurozone.
Risks to this view
A significant reversal in the inflation outlook, such as a sudden easing of energy prices or signs of economic weakness, could prompt the ECB to reconsider its rate hike path, impacting the current market consensus.
Older quick take Quick take Published 13:00 ECB’s September minutes reveal full support for 25bp rate hike The just-released minutes of the ECB’s September meeting confirm that the decision to raise interest rates by 25bp was driven by a deteriorating inflation outlook Christine Lagarde, President of the ECB By the time the ECB met in September, a 25bp rate hike had already come to be seen as the most likely outcome. The just-released minutes of that meeting show that the ECB’s Governing Council was united in its view that a worsening inflation outlook and economic resilience called for a hike. The minutes, however, give a less hawkish picture than ECB president Christine Lagarde’s comments at the press conference.
Here are the most relevant phrases from the minutes: Worsened inflation forecast the reason for the rate hike. The updated staff projections indicated that inflation was set to remain well above target for an extended period. Increasing the deposit facility rate from 2.25% to 2.50% was a robust decision across a wide range of scenarios.
While measures of underlying inflation had shown little change so far, the full inflationary impact of the energy shock had yet to play out. Some ECB members pointed to less inflation drama. It was pointed out that the energy shock could be less persistent than assumed, as it was essentially a politically driven shock that could disappear as quickly as it had appeared.
And not all members were fully supportive of the resilience narrative. It was still too early to draw a firm conclusion about the degree of resilience of the economy on the basis of the latest growth figures. The risk of the knock-on effects of higher energy prices on the rest of the economy remains.
Rising energy prices could also transmit to food prices. In addition, higher fertiliser prices precipitated by the energy shock, together with the impact of El Niño and recent heatwaves, could put upward pressure on food commodity prices. But there have been few indirect effects so far.
Indirect effects had remained contained and second-round effects had not been seen. It was also suggested that a cooling labour market and moderating wage growth could limit the risk of second-round effects. On France.
Not a single word. Only that a further rise in long-term interest rates could adversely affect growth. The concept of a neutral interest rate does exist .
While it was noted that the response should remain proportionate, it was also pointed out that a deposit facility rate of 2.50% remained in the range of neutral interest rates estimated by staff. No forward guidance. Against this backdrop, communication should remain neutral, neither suggesting that the current decision was another step in a predetermined tightening cycle nor that it was the last rate hike.
At the same time, continued vigilance was vital. All in all, the minutes show an ECB that saw no risk in hiking rates at the September meeting, but looking ahead was more balanced than the comments at the press conference suggested. French fiscal situation will push ECB to be more dovish The next ECB meeting is in three weeks.
So far, there is little reason to believe that the bigger macro picture will change significantly until then. Maybe with one exception: the rise in bond yields and the fiscal situation in France. The surge in German bond yields since the September meeting has already had the same impact on growth and inflation as an additional 25bp rate hike.
For France, it's closer to a 50bp hike. With bond markets doing the ECB's job, some officials might be less keen to continue hiking than they were at the September meeting. The ECB’s October meeting doesn’t look like a meeting to discuss further rate hikes.
This will be for the December meeting. However, the October meeting could facilitate a more general discussion on how to react to the current French situation and speculations by some market participants on a new eurozone sovereign debt crisis. Here, we see three potential policy responses: the first was already prepared by Lagarde during her comments at the European Parliament: easing the hawkish tone and possibly agreeing on fewer rate hikes than markets had priced in.
The second is the end of Quantitative Tightening and a restart of reinvesting matured bonds. This could bring some relief to bond markets. The ECB could even decide to purchase eurozone debt but not French debt, in case France is not able to pass a budget compliant with the European fiscal rules.
And the third, and more distant, option would be to start the Transmission Protection Instrument. It would be more outright asset purchases, aiming at narrowing spreads. In any case, it looks as if the hawks from the September meeting might find themselves as more collateral damage from the French fiscal mess.
Monetary Policy Inflation GDP Eurozone ECB Content Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Author Carsten Brzeski Global Head of Macro Older quick take
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