🏦🇪🇺Desk Commentary: ECB October Rate Decision

UBS:

• The discussion surrounding rate cuts is incredibly premature at this stage. The inflation outlook will be closely monitored, along with incoming data. Lagarde firmly stated the need to remain "steady' - reinforcing the ECIEVs decision to hold policy rates.

• Thoughts From Trading: The rate decision was somewhat of a non-event. The commentary that followed reiterated the gloomy current situation in the Eurozone and the importance of data-dependency going forward. The main focus now is on the flash Eurozone October CPI print next week (31st Oct).

ING:

• After the September meeting, many ECB officials didn’t like the market interpretation of a dovish pause and therefore kept the door to further rate hikes wide open. If anything, today’s meeting actually further established the concept of a dovish pause. The ECB has never been more worried about the growth outlook and relatively relaxed about potential new inflation waves, stemming from oil prices. As a result, unless the eurozone economy miraculously rebounds in the coming weeks, we expect today’s dovish pause to eventually be seen as the end of the hiking cycle.

Rabobank:

• President Lagarde did not explicitly outline the ECB’s reaction function if a potential escalation of the situation in the Middle East were to lead to another energy price shock. Not even after she was asked if the Governing Council had drawn lessons from the recent energy crisis.

• We had expected a much stronger commitment to act in the event of a new energy shock that would put the inflation outlook at risk. Yet, the statement above does not suggest much urgency or concern about the potential (‘non-transitory’) impact on inflation.

• Although President Lagarde subsequently reiterated that the ECB remains determined to reach its inflation target, her balanced view on the potential impact is on the dovish side and provides much less insulation against potential decoupling of inflation expectations if a new shock were to occur. That could be a missed opportunity she will later come to regret.

Goldman Sachs:

•  Base case expectation is that the European Central Bank will cut interest rates from the Q3 2024.

• A sharp slowdown in the economy or a larger-than-expected deterioration in the labor market could prompt an earlier shift towards policy easing.

• See the ECB's long cycle of rate increases is now complete.

Danske Bank:

• As expected, ECB kept policy rates unchanged at today’s meeting and guided that they are done with additional rate hikes.

• Lagarde seemed to be on a mission not to rock the boat in terms of market pricing, she succeeded well and gave indications that this was a stock taking meeting only.

• Lagarde highlighted uncertainty about the economic outlook and remained confident that inflation would return to the target if rates were maintained for a sufficiently long duration at the current level, based on today’s inflation. Surprisingly, no discussion took place today on advancing the full end to PEPP reinvestments.

• The outcome was marginally on the dovish side of expectations and led to a minor dovish market reaction to the ECB decision and the press conference, which was supported by US data release along the way. Markets are pricing the first full rate cut in June next year

Commmerzbank:

• If the ECB rate is not yet high enough according to the Taylor rule, it is more important than ever that the ECB keeps the deposit rate at 4.0% for as long as possible and does not cut it too soon. Unlike the Federal Reserve, which has raised its key rate to 5.5% (upper bound of fed funds target range), the ECB has no room to cut rates again next year