**A little late, busy week.
HSBC:
With inflation still close to double digits and policy not yet restrictive, the ECB clearly faces pressure to increase rates significantly even amid contracting economic activity and recession. With risks remaining elevated, near-term catalysts to unlock value in European equities remain unlikely.
Still, cooling inflation, lower gas prices and easing of supply-chain bottlenecks may provide scope for a policy pivot in early 2023 that could boost market performance. European equities still face risks that prompted the European Central Bank to increase interest rates by 0.75 percentage points to 1.5% on Thursday, but next year looks better.
Goldman Sachs:
The European Central Bank's long-run inflation expectations in Friday's Survey of Professional Forecasters may prove key for the future path of interest rates. Following the ECB's 75 basis points rate rise on Thursday, investor focus will turn to Friday's survey for evidence of second-round inflation effects. Further strength in inflation or inflation expectations could prompt the ECB to maintain its aggressive approach at the next meeting in December with a further 0.75bp rate rise. For now, expect a 50bp rate rise in December in anticipation of further signs of an economic slowdown and the ECB statement that it's "made substantial progress" in tightening policy
ABN AMRO:
ECB projected inflation at the end of 2024 at 2.2%, on the basis of a policy rate around 2%. That would imply that the policy rate needs to go slightly above 2%. However, that also assumed that the eurozone economy would expand by 0.9% next year, where as we think average economic growth will be around two percentage points lower. Given this and the sharp further tightening of financial and bank lending conditions since then, we remain of the view that the deposit rate will peak at 2%, most likely in December
Ending APP re-investments would likely shrink the ECB’s balance sheet by a little below EUR 30bn a month, so it would be a very slow process. Indeed, the repayment of TLTROs will be a much more significant driver of balance sheet reduction next year.
ING:
Lagarde tried to give the impression that there will be more than one more rate hike. However, her comments about the fact that the ECB no longer believes in any estimates of a neutral interest rate, after previous comments that the central bank no longer believed in its inflation projections, make it hard to identify the ECB’s precise reaction function. This reaction function can probably be summarised as 'whatever, whenever'. Lagarde also mentioned the word “recession” and stressed that incoming data and the next staff projections at the December meeting would be important. A first opening for a dovish pivot at the December meeting.
We think that the debate at the December meeting will already be much more controversial than today, delivering another 50bp rate hike. However, as the ECB’s inflation outlook for 2024 was already at 2.3% in September and will very likely be at 2% for 2025 at the December meeting, it is hard to see how the ECB can deliver more than an additional 75bp rate hikes.
BBVA:
Overall, today’s meeting does not point to any particular bias to our view that the ECB will hike rates by 50bp in December and 25bp more in February, to reach 2.75% as a terminal rate, although probably will interpret it as slightly dovish. The macro view seems also to coincide with an outlook of a relatively shallow recession. The decisions on TLTRO’s recalibration to ensure the transmission of monetary policy go also in line with expectations of making smoother monetary policy normalization (balance sheet reduction starting this year and paving the way to stop APP full reinvestments next year).
Swedbank:
Survey data point to a contraction in economic activity already in the third quarter. The pace of monetary tightening raises risks of both disorderly market moves, as seen in the United Kingdom, and deepening of upcoming economic slump. We expect a further 50bp increase in key rates in December, followed by two more 25bp hikes in the beginning of 2023. By then, we believe, weak economic performance and slowing inflation will no longer warrant further rate increases. Furthermore, we expect the ECB to start cutting rates down to 2% in the end of 2023.
Citi:
The ECB's 75-basis-point interest-rate rise on Thursday was accompanied by clear dovish tilts on the factors determining the next step. The market re-pricing already looks sufficient, however, and we do not expect the rally to have legs
Barclays:
Markets perceived the European Central Bank's messaging on policy rates as relatively dovish despite a 75 basis points interest rate rise, with a shift from the unique focus on inflation. ECB President Christine Lagarde mentioned that three factors in particular would be key for the future trajectory of policy rates are the inflation outlook, but also bearing in mind the extent of recession risks, the magnitude of tightening already completed to date and transmission lags from the policy rate to the real economy. Overall, this marked a meaningful shift from the much more single-minded focus on inflation at the September meeting.
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