Lagarde’s comments point to a December ECB rate hike
The desk believes that the ECB's decision to maintain current interest rates, while signaling a potential hike in December, reflects an ongoing determination to combat inflation despite increasing growth risks. Per the full note, ECB President Christine Lagarde's commentary highlighted upside risks to inflation and downside risks to growth, suggesting the central bank's inflation-fighting stance remains intact amid stagflation concerns. The latest economic indicators still show resilience in the eurozone economy, which could support the possibility of a rate increase. As we look ahead, no high-impact events are scheduled for this jurisdiction over the next month, but market positioning around the potential December hike will be crucial.
What the desk is arguing
The desk posits that the ECB is likely to implement another rate hike in December despite current economic challenges. This perspective is rooted in Lagarde's remarks during the ECB press conference, which suggested that inflationary pressures remain a significant concern, potentially justifying further tightening measures in light of resilient economic indicators.
While the ECB paused rates in the latest meeting, driven by the restrictive stance already imposed by rising bond yields, the risks remain skewed towards inflation, which emphasizes the central bank's intent to remain vigilant. November's upcoming inflation data could provide further direction, but current trends indicate that a hike by December is more probable than not.
Where it sits in our coverage
Our internal consensus target for the EUR/USD is 1.075, within a range of 1.04 to 1.12. Notable targets from aligned firms include:
- jpmorgan: 1.10 (Mar26)
This view aligns with jpmorgan, while diverging from bofa, which has a lower target of 1.04 (Mar26). The desk's call leans toward the upper end of the expected range, indicative of confidence in the ECB's commitment to addressing persistent inflation.
How other firms see it
Analysts at firms like jpmorgan and hsbc appear to share a similar bullish sentiment toward a potential rate hike, reflecting growing concern over inflationary pressures. Conversely, bofa takes a more cautious approach, anticipating a slower response from the ECB given the economic headwinds.
Market dynamics to watch include the relationship between the EUR/USD and overall eurozone inflation indicators, particularly as they could signal changes in the ECB's monetary policy trajectory.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Lagarde's commentary indicates a potential rate hike in December despite economic challenges.
- 02Current inflation pressures remain a central concern for the ECB, suggesting a strong commitment to tightening policy.
- 03Market positioning will be critical as traders prepare for upcoming inflation data and its implications for monetary policy.
Market implications
Traders should closely monitor levels around 1.075 as a key threshold that may signal a break, especially in light of any new inflation data released before the anticipated December hike. Positioning will be critical as the market interprets ECB communications and economic developments.
Risks to this view
Should there be a significant negative economic shock or a downward revision in inflation forecasts, the ECB could decide against a December hike, which would likely lead to reevaluations in market positioning and sentiment.
Articles Lagarde’s comments point to a December ECB rate hike Published 14:20 Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Upside risks to inflation and downside risks to growth clearly complicate the ECB's job. However, comments at today's press conference suggest the ECB is set to hike again in December Carsten Brzeski ECB President Christine Lagarde addresses a press conference following today's meeting Rates on hold and Lagarde out. That’s the headline from today’s ECB meeting.
But look beyond that, and the message is more nuanced: despite growing stagflationary pressures, the ECB still looks set to hike rates again in December. The decision to keep interest rates unchanged was not a surprise. The main argument behind this decision is that there are currently few knock-on effects from higher headline inflation, while financing conditions, mainly bond yields, have become more restrictive.
A pause after two rate hikes this year was expected, even if macro developments since the last meeting could have justified another rate hike. Headline inflation increased again in September, and most leading indicators point to continued resilience in the eurozone economy. However, the surge in bond yields on the back of the French crisis is already imposing a new restrictive monetary policy stance.
Or in other words, the bond market has taken over the ECB’s job. According to Christine Lagarde, risks to the eurozone’s growth outlook remain tilted to the downside, while risks to the inflation outlook are tilted to the upside. A combination of risks that clearly complicates the ECB’s path ahead.
This dilemma was underscored by her observation that key developments since the September meeting have been a further rise in energy prices and a worsening of financing conditions. Despite these new complications, the ECB apparently debated a rate hike today. However, the worsening of financing conditions took the option off the table.
Lagarde also emphasised the importance of indirect and second-round effects from higher energy prices. Currently, the ECB is not seeing any additional second-round effects, other than the ones included in the September staff projections. ECB looks set to hike again in December despite increasing stagflationary pressures Looking ahead, there are three main parameters that, in our view, will determine the ECB’s path going forward: The length and intensity of the war in the Middle East.
The longer oil prices remain elevated, the higher the probability of more rate hikes. The knock-on effects of higher energy prices. So far, there has hardly been any pass-through of higher energy prices in the rest of the economy.
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