🏦🇪🇺 Desk Commentary: ECB July Monetary Policy Decision

UBS:

• The guidance on policy states it is a data-dependent outlook. There's no direct indication of more hikes to come, or a way to go. There might be — and the market is certainly pricing another hike — but the ECB isn't pushing for it forcefully.

• On balance, the ECB is indicating it is approaching terminal policy.

• European Central Bank President Christine Lagarde, when asked "Do we have more ground to cover?" - said "No, I don't think son. The euro dropped to the low of the day in the wake of the comment.

• The straight read of this is that the ECB is all done - it will likely be followed up with clarifications about data dependence. But Lagarde has surprisingly indicated that the ECB isn't currently pushing for any further increases.

• Contrast that to the Federal Reserve. The market is content the Fed is done - but the Fed keeps the optionality on with the dot plot. The market thought the ECB had more to do, and the ECB is removing reason to believe that.

J.P. Morgan:

• The European Central Bank's cautious tone makes sense, with the data indicating monetary tightening is now feeding through. Growth that has slowed sharply according to purchasing managers data, whilst core inflation has turned a corner.

• The tone of today's monetary policy decision and press conference was more dovish than June, indicating a potential pause in the hiking cycle in September

• JPM AM expects the ECB to remain on hold for some time, only cutting rates when the labor market starts to weaken and core inflation is clearly trending back towards target.

Deutsche Bank:

• Paying a zero rate on minimum reserves was unexpected. It's a slight further tightening of the stance.

• The question is whether this is for the hiking cycle. In a very slight but important tweak to the wording of the statement, the ECB has opened the door to a pause in September. But it will depend on the data, and Friday's inflation data might tell investors more about the potential for a September hike than the ECB press conference on Thursday

Commerzbank:

• Unlike in June, ECB President Christine Lagarde Thursday didn't hold out the prospect of another rate hike at the next meeting. Instead, she made it clear that from now on it would depend on the macroeconomic data. These will determine whether the ECB will raise its key interest rates at the next meeting in September or whether it will pause. As a consequence, the ECB has switched off the autopilot.

• The ECB is unlikely to raise its interest rates in September. This is because the data are likely to strengthen the position of the many doves in the ECB:

• -- Economy: Leading indicators such as the PMIs have recently continued to fall significantly. The important index for the service sector is barely above the recession threshold. This will force the ECB to lower its very optimistic economic forecast for the second half of the year in September.

• -- Inflation: The inflation rate should continue to fall rapidly in the coming months. This is because the wave of energy and food inflation will continue to subside. This also applies to the prices of goods (excluding energy), which are also rising more slowly after the supply bottlenecks have subsided. All these effects will have a much stronger impact in the second half of the year than the strongly rising prices for services.

• There is much to suggest that the ECB will pause in September and won't raise interest rates after, however, we do not share the consensus' optimism that the ECB will lower its rates again as early as next year. This is because the sharp rise in wages will keep services inflation high. This will prevent inflation from falling further in 2024, so even the dovish-dominated ECB is unlikely to cut its rates next year

MUFG:

• After Thursday's policy update, the eurozone rate market is no longer as confident that the ECB will hike rates further, there are now only 9bps of hikes priced in by September and 16bps of hikes by the end of this year.

• Market participants then expect the ECB to begin lowering rates by the second half of next year. The dovish repricing of ECB policy expectations has weighed heavily on the euro. After hitting an intra-day high earlier today at 1.1150, EUR/USD has just fallen back to the 1.1000 level.

• If support at the 1.1000 level holds in the near term, it would support MUFG's call that EUR/USD has moved into a new higher trading range between 1.1000 and 1.1500 after spending most of this year trading between 1.0500 and 1.1000.

• On balance, the dovish policy shift from the Fed will be more important for foreign exchange (FX) markets leaving the door open for EUR/USD to strengthen modestly through the rest of this year even if the ECB hiking cycle has ended. We are sticking with its current forecasts for EUR/USD outlined in the July FX Outlook report after incorporating recent shifts in policy expectations for both the ECB and Fed, and building optimism over a softer landing for the global economy.

• The developments are supportive for further near-term gains for cyclical currencies (commodity & emerging markets FX) against the euro and US dollar.

ING:

• It took Lagarde many words to put forward a simple message: the ECB has officially switched off the autopilot. Whether this means that rates will no longer be hiked is unclear. The mention of inflation coming down but staying above target “for an extended period” does not sound as if the ECB is yet willing to stop hiking rates. On the other hand, the worsening macro outlook seems to have scared off some ECB members, making a pause in September a possibility.

• We think that the ECB is not yet done with hiking rates but a pause has become fashionable amongst central banks, which had been ahead of the ECB in their hiking cycles. In fact, the ECB’s own growth and inflation projection in September will have to see a significant downward revision in order to stop the central bank from hiking rates at least once more after today.

Rabobank:

• Whereas the main announcements were fully in line with expectations, the ECB’s decision to change the remuneration of banks’ required reserves did come as a bit of a surprise. The change should have little impact on the policy stance. Yet, it is an immediate cost saving for the ECB, and it could thus be inspired by the concerns about central bank losses

• The impact on the effective stance of monetary policy will probably be marginal at best. Some policymakers supported the move because it would help reduce the amount of liquidity. However, the lower remuneration of these required reserves may be incorporated in retail and wholesale deposit rates – again, the overall impact will probably be marginal though. More importantly, though, we argue that this hits banks with smaller amounts of liquidity disproportionally more than those banks that still have large amounts of excess liquidity. After all, these banks will see a larger share of their reserves being remunerated at 0%.

• The relatively marginal policy gains suggest that the cost savings are the main reason behind this change. Given the earlier focus on potential losses as a result of the Asset Purchase Programme and the potential risks to (the perception of) the ECB’s independence, the remuneration may be seen as a quick win to remedy some of these shortfalls.

Scotiabank:

• All else equal, Thursday's ECB, with information to date and the views expressed by policymakers, would likely not hike in September -- nor again in this cycle. Sticky core inflation and strong wages growth continue to support baseline case of a final 25bps increase at quarter-end but may require inflation surprises.

• Guidance on future decisions went from ensuring that interest rates "will be brought to levels sufficiently restrictive" to "will be set at sufficiently restrictive levels", opening the door to a pause -- but not closing it to more hikes.

• The spread of United States to German two-yr yields widened by 14bps from pre-statement levels, with year-end ECB pricing down 5/6bps to still show a roughly three-in-five chance of an additional 25bps hike.