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🏦❗️Cable FX Macro Weekly Note: ECB September Monetary Policy Decision

**As seen in Risk In The Week report 09/08/23, subscribe at

The ECB hiked its main refi rate by 25bps to 4.25% in July, this was expected by most economists. The move came just days after data showed eurozone banks company loan demand dropping the most on record, this reflected monetary conditions tightening further in the region. The central bank stated that future decisions will aim at keeping rates in restrictive territory. However, we then heard Lagarde say that the board will keep an open mind for the September and beyond decisions. HICP remains above the central bank price target, but it has been moving in the right direction. The figure excluding energy, food and tobacco eased to 5.3% from the prior 5.5%. Growth has been softening with both services and manufacturing sectors throwing readings below 50.0, and the most recent EU 2Q GDP revision showed the economy barely growing. The current situation makes it harder to put chips on the ECB hawks, recent remarks from Holzmann said that the September hike is likely. We will see if the recent downturn in growth pushes the board to downgrade its outlook. The desk at Morgan Stanley said they would expect the ECB to hold in September, leaving the peak rate at 3.75%. They noted that cooling services inflation and an acceleration in PMIs downtrend are set to support this view, they added that the 2025 inflation forecast will show inflation getting closer to target. Morgan Stanley warned that communication will be key in September as the central bank is likely to stress their decision is a pause, not a hard stop. Morgan Stanley economists revised their eurozone 2023 growth forecast to 0.6% from 0.9%, while they have lifted their inflation call to 5.6% Y/y from 5.4%. As of Friday, the swaps market penciled in a 40% chance of an ECB rate hike this month. Analysts at Natixis said that whether September concludes on a dovish hike or a hawkish pause, the uncertainty over the terminal rate is likely to remain. Natixis is recommending investors to fade a dovish ECB outlook, as they describe it as “over-optimistic.”



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