AXA IM: ECB November meeting

AXA IM: ECB November meeting

ECB
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Hugo Le Damany, Economist at AXA Investment Managers, comments on the latest European Central Bank (ECB) Governing Council meeting.

  • As expected, the ECB Governing Council maintained the status quo, justifying this decision by uncompleted recovery and confidence that stronger than expected inflationary pressures remain " temporary". 
  • In response to current market pricing, Ms Lagarde reiterated that it remains incompatible with ECB’s forward guidance and that the conditions on inflation “are not satisfied yet”.

Despite some headwinds from rising energy prices and intensified supply shortages, the ECB remains confident that growth momentum in euro area remains well oriented, thanks to robust domestic demand and strong recovery in the labour market. On prices front, the ECB continues to believe inflation will rise further in the coming months but should decline in the course of 2022 with the end of the base effect from German VAT in January 2022 and gradual normalization from energy prices and supply shortages.

In response to current market pricing (10bp hike at the end of 2022 and 25bp by mid-2023), Ms Lagarde reiterated that it remains incompatible with ECB’s forward guidance and that the conditions on inflation “are not satisfied yet” to justify any hike.

On PEPP, Ms Lagarde stated it should end in March 2022 but did not disclose any details for the future of APP, postponing all decisions to the next meeting in December.

Ms Lagarde mentioned that nominal interest rates have risen in the recent weeks, but financing conditions have remained “favourable”. The ECB’s Q3 lending surveys reported broadly unchanged lending standard for corporates and on a forward-looking basis, banks overall expect credit standards to tighten modestly in Q4 and loan demand to increase, in particular for corporates.

But interestingly, the current pace of net PEPP purchases is not yet "moderately lower [...] than in the second and third quarter", with weekly net purchases reaching €18.4bn in the last three weeks against €17.7bn in average in Q3 and €18.3bn in Q2. It is definitely quite hard to understand this “holistic and multi-faceted” approach...

In December, we continue to believe APP will be slightly scaled-up to approximately €40bn per month to avoid a sharp drop in net purchases but also because core inflation should remain below the 2% target at the end of projection horizon. We also believe the ECB needs to transfer a bit of PEPP flexibility to the APP. Maintaining the more flexible PEPP rules for reinvestments and/or slightly adjusting the capital key would provide some leeway. But, as proposed by French Governor Villeroy de Galhau, the ECB may also extend the APP with a small envelope to use “if need be” in order to add “some forms of flexibility of purchases over time”.

During Lagarde’s speech, financial markets have moved quite importantly. It is difficult to extract precise information as preliminary US Q3 GDP and jobless claims figures have been published at the same time but 10y German bond rose by 6bps before retreated to -0.13% while EUR depreciated by 0.5% in few minutes versus USD.