Europe | Monetary Policy & Inflation
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Summary
- The ECB held rates unchanged (deposit rate at 4.0%), and made almost no changes to its statement.
- The press conference was not very informative. As expected, Lagarde pushed back strongly on the idea of near-term rate cuts, and left the door open to further hikes if needed.
- Her insistence that PEPP was not discussed seems unlikely. We expect to hear more information on this in the days ahead from other policymakers.
- Next week’s GDP and inflation data will be important, we will be watching for signs that growth is (still) not as bad as PMIs suggest, and whether inflation momentum continues to slow.
- For now we see value positioning for a more hawkish ECB than currently priced. BTPs could again come under pressure if there are more concrete indications that PEPP’s end could be accelerated (see here for more analysis).
Pause Rate Hikes – Little Change to Statement
The ECB kept its rate policy unchanged at their meeting on Thursday as expected. The statement was little changed, and was relatively balanced in its assessment. As expected there was no change in statement around PEPP, although given the recent series of policymaker comments we do not see this staying the case for too much longer.
President Lagarde’s assessment boiled down to:
- EZ growth remains weak (manufacturing weakness feeding into services), but should strengthen ahead. The outlook is dependent on strength of the labour market (which is showing signs of weakness). The outlook remains skewed to the downside, particularly given geopolitics.
- Repeated calls for fiscal prudence, a need to roll back government spending to counter cost rises, need to focus fiscal policy on productivity and reducing total debt, and the need for the EU fiscal reform to be agreed by year-end.
- Inflation assessment was more balanced, September’s inflation decline was broad-based, with price pressures moderating in tourism in travel, but strength still in domestic price pressures driven by wages. Upside risks in inflation from food and energy, but downsides from weaker growth.
- There were some concerns around the high inflation expectations, which could be used to justify higher wage growth.
- Policy transmission has been strong (as per the most recent bank lending survey). Lagarde sees pipeline tightening continuing ahead, although strangely she mentioned only the next two quarters as seeing this. We have previously written on the subject, our concern is that pipeline tightening may be less than the ECB expects.
Lagarde Pushes Back on Cuts and PEPP Talk
The press conference must rank as one of the least informative that Lagarde has given. She did her best to quash questions on almost every topic, from discussion of an early end to PEPP reinvestments (there was none), on the idea of near-term cuts (no appetite), and on any risks arising from the recent rise in yields (not reflective of Eurozone fundamentals). As expected she also reiterated that she was not calling the end of hikes necessarily.
We do not think near-term cuts are likely given the risks from fiscal policy, wage growth and geopolitics. On this, her comments basically parroted Lane’s in focusing on Q1 negotiated wage settlements as the key ingredient to know when they can loosen.
However, her comments on PEPP seem far less credible. More than a quarter of policy makers (7/25 by our count) have mentioned their desire to discuss an earlier end to reinvestments in the last month or so. The idea that it was not raised at the meeting seems very unlikely.
Sure enough, just a few hours after the meeting, and there were already early suggesting policymakers have agreed to discuss PEPP early next year. We will hold our judgement until these become more concrete, but that would be somewhat more believable than the idea being completely overlooked.
Fortunately, we do not have to wait long to get more tangible information. Next week’s preliminary GDP (Q3) and inflation numbers (October) should provide some nuggets of interest. We will be watching for whether GDP has undershot recent PMI survey negativity, and whether inflation momentum continues to slow.
On the whole we like to continue to fade the lack of hawkishness priced into the ECB, and would see the prospect for further BTP weakness on a sooner PEPP winddown (highly likely).