UniCredit:
The European Central Bank increased rates as expected, but its rhetoric clearly turned more prudent, and this is a good thing given the current lack of visibility. While the ECB retains a tightening bias, it wisely decided to turn data-dependent--this time for real--, dropping any forward guidance on policy rates amid high uncertainty related to recent financial market developments.
The rate trajectory from here is extremely uncertain. The ECB retains a tightening bias, but financial markets and tighter credit conditions might challenge this. The ECB's greater focus on financial conditions is good news, because it should help reduce the risk of policy mistakes going forward.
ING:
Lagarde today tried to convey the message that the ECB was not yet done with hiking interest rates, saying that there was still “a lot more ground to cover”.
The fact that the ECB also (rightly) refrained from presenting any new forward guidance and stressed data dependency shows that the peak in interest rates might be nearer than many think. Today, the ECB didn’t blink in light of the recent market turmoil. The next hours and days will show whether the ECB can stick to this stance.
Therefore, today’s decisions could mark the start of the final phase of the ECB’s tightening cycle: a slowdown in the pace, size and number of any further rate hikes. We stick to our view that the ECB will hike two more times by 25bp each before the summer and then move to a longer wait-and-see stance.
ABN AMRO:
The ECB expressed confidence in the banking sector, while setting out that it stood ready to act if needed. It noted that it is ‘monitoring current market tensions closely and stands ready to respond as necessary to preserve price stability and financial stability in the euro area.
Our baseline scenario sees the ECB policy rate peaking at 3.75% before a rate cut cycle begins in December and continues during 2024. Today’s ECB meeting suggests that the risks are now skewed towards a lower peak for two reasons. We expect economic growth to turn out weaker than the ECB expects as the impact of monetary tightening dampens demand more strongly than in the central bank’s projections.
However, there is uncertainty about how quickly that comes through convincingly in the macro data. Meanwhile, although we agree with the ECB that eurozone banking sector fundamentals are generally solid, there is a risk that financial market tensions continue to escalate to the extent that financial conditions tighten more sharply.
UBS:
We saw markets pricing ECB hikes further out. Euribor strip added more hawkish bets as it reacted to the hawkish comments from President Lagarde. Implied pricing for this year is rising, the market has now 28 basis points priced in for the May meeting; this time on Wednesday it was at only 18 basis points.
We noted ECB's President Lagarde noting credit supply starting to tighten, in the board's view, this is a positive development. However, the liquidity/credit channel has not tightened as much as the ECB would have hoped for.
We think that this would be a reason for the market to start reducing its expectations of rate hikes, a shrink in liquidity would be equivalent to a rate hike. We expect the most hawkish central bankers on both sides of the Atlantic to step down their rate calls if liquidity starts to do the heavy lifting.
Danske Bank:
Markets are little changed after the press conference today and are now pricing in a 50/50 probability of the ECB hiking in May at all. However, as we see it, the question boils down to whether or not this turmoil in the banking sector turns into a macroeconomic crisis; the market pricing represents this very binary outcome space. If yes, this is deflationary in itself – and therefore sizeable rate cuts could follow, which could lead to a significant steepening of the curves; however, if no, (our baseline), markets appear ripe for a repricing higher in yield as inflation is still stubbornly high for the central bank to accept. This suggests more curve inversion. That means we should see a significant repricing once the dust settles.
We entered the meeting with a fundamental predisposition of wanting to sell EUR/USD rallies on a 50bp hike, but the cross hardly reacted, with the FRA curve flattening upon announcement. Looking ahead, systemic risk fears look set to dominate price action among majors. Our bias remains for systemic fears to subside over the coming weeks, but we humbly acknowledge the high sensitivity to negative news, which leaves us side-lined with no high-conviction calls near term. On a 3-6M horizon, we still pencil in a lower EUR/USD compared with current spot levels.
TD Securities:
The ECB remains highly concerned about inflation as it raises the central bank's policy rate by 50 basis points. We note the statement highlighting "inflation is projected to remain too high for too long."
This does not sound like an ECB that wants to stop tightening policy yet, although the statement fairly reflects the heightened uncertainty going forward.
Commerzbank:
The ECB's decision to stick to its guns and lift rates by 50 basis points boosts its credibility, this was necessary as inflation risks remain pronounced.
Instead of slowing the pace of rate hikes, the ECB's communiqué emphasized the strong capital liquidity positions of eurozone banks, but also that if worse comes to worst, it stands ready to provide liquidity.
Further out, the ECB's path will depend on whether market turbulence subsides or not, while we think the turmoil will gradually subside in the coming months, allowing the ECB to focus on its mandate. We expect the deposit rate to rise to 3.5%.
Comments