La Française: No guidance for September - a pause, a skip or a hike?

La Française: No guidance for September - a pause, a skip or a hike?

July 25, 2023

ECB
Inflatie (05) rente

It is widely expected that the European Central Bank (ECB) will raise its interest rates by 25 basis points (bps) at the July meeting.

This is what we expect: 

  • The ECB to increase its key interest rates by 25 bps, bringing the deposit rate to 3.75% and the Refi rate to 4.25%.
  • The Governing Council (GC) to maintain the meeting-by-meeting approach with the possibility of pausing rate hikes in September as data since the June meeting showed the eurozone economy losing steam and inflation falling for a third straight month in June.
  • President Lagarde to indicate that the monetary policy stance for September is conditional on new data and the updated assessment of economic projections.
  • Christine Lagarde to reaffirm that the ECB will maintain policy rates in restrictive territory for a longer period in order to break the persistence of inflation.
  • The ECB to leave Pandemic Emergency Purchase Programme (PEPP) forward guidance unchanged; maturing securities will be reinvested in a flexible manner at least until the end of 2024. We believe President Lagarde will indicate that the GC is not considering an early end to PEPP reinvestments at this stage or even discussing the outright sale of bonds held on its balance sheet to accelerate its quantitative tightening (QT) despite some recent comments from hawkish ECB members.

In summary, we expect the ECB to continue its strategy that is a “data-dependent approach and meeting-by-meeting optionality” as the GC approaches the potential peak rates. It is unlikely that President Lagarde will pre-commit to any explicit guidance for September and beyond.

However, she will likely warn that the ECB tightening cycle is not over. Nevertheless, the ECB’s communication may be more balanced, especially after surprisingly dovish comments from two ECB-member hawks (Klaas Knot and Joachim Nagel). Consequently, this meeting may push the Euro currency and eurozone interest rates slightly lower.

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