European Central Bank: Hawkish path toward December peak – Deutsche Bank

Deutsche Bank’s Mark Wall and colleagues say the European Central Bank delivered a 25bp hike to 2.50% in September, with President Lagarde describing it as a no‑brainer. They argue the tone remains hawkish, with core inflation projected above target and policy likely shifting into mildly restrictive territory, supporting their call for another hike to a 2.75% terminal rate in December.

Lagarde balances hawkish tone and data

"As expected, the ECB hiked 25bp to 2.50% in September. President Lagarde called the decision a “no-brainer”. The September policy announcement had hawkish and not as hawkish elements. Overall, the message and tone are consistent with our call that the ECB hikes again to a terminal rate of 2.75% in December."

"Core inflation is projected to be 30bp above target at the end of the forecast horizon, implying the tightening cycle is not over yet. The comment about inflation being “well above target for an extended period” implies persistence. Within the ECB’s policy framework, this is consistent with a move away from a “measured” response towards a more “forceful” response. That is, a rising willingness to hike above neutral into mildly restrictive territory."

"At the same time, President Lagarde didn’t want to feed the market’s already hawkish pricing. When asked, Lagarde would not repeat what she said in July about the market understanding the ECB reaction function. Moreover, Lagarde said the Governing Council was not taking a view on the direction of policy going forward. We are inclined to interpret both comments as Lagarde sticking more closely to the ECB’s “data-dependent, meeting by meeting, no precommitment” mantra. Neither rules out a hike to 2.75% in December."

"The risks are two-sided. On the one side, if the data weakens, it’s possible the ECB stops at 2.50%. But the onus is now on the data to weaken quickly to stop the ECB hiking again. It’s not impossible. High energy prices could trigger demand destruction. It’s a question of how much and when. On the other side, further hikes feel difficult when there is no evidence of second round effects and no compelling evidence of indirect effects. But if growth remains resilient, neutral rates rise and energy prices remain elevated, maybe rates do rise to 3%+."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)