The central bank bonanza this week continues as we move to Europe, with the ECB decision up next on the agenda today. After all the drama over the past day, we should likely get a much less exciting event later from the ECB later.
The central bank is widely expected to leave key interest rates unchanged, with markets pricing in roughly 87% odds of a hold. That should keep the deposit rate at 2.50% following the 25 bps rate hike in September already. So barring any major surprises, the policy decision itself should be a relatively straightforward affair.
The real question is whether ECB president Lagarde can get through her press conference without giving traders much of any reason to rethink December. Markets are currently pricing in around 64% odds of another rate hike by year-end. And I reckon policymakers will be quite comfortable in wanting to leave those expectations exactly where they are for now after today’s decision.
After all, inflation pressures are mounting in Europe during a time when fiscal risks are being thrust into the spotlight and growth momentum is beginning to slow down.
Euro area headline annual inflation in September recorded a 3.8% while core annual inflation also remains stubborn at 2.5%, with services inflation keeping sticky at 3.2%. All of that just continues to make the case for further tightening even if energy prices continue to be the key driver in pushing up headline prices.
For now, policymakers will look to play things down in questioning whether there will be broader pressures to underlying inflation and/or any spillover to wages.
But then, you have the rather damning situation in France. The recent turmoil in French bonds has already pushed borrowing costs higher, tightening financial conditions without the ECB having to lift a finger. So, that complicates the argument for rushing into another hike – especially with growth risks still lurking.
So, what can we expect today?
The statement language should be more or less the same as it was last month, with the ECB likely to emphasise that they are still wary of inflation risks. However, Lagarde’s press conference is the one where most of the talking and answering will have to be done.
I suspect that she will surely tick to the usual script of remaining data-dependent, keeping all options open, and avoiding any firm commitments on December. And quite frankly, that is probably the best and smartest way to go about it today.
The bigger risk for markets is if Lagarde sounds either too concerned about growth and bond yields or accidentally hinting that the central bank is too eager to tighten policy again. The former could weigh on the euro and rate expectations, while the latter could send bond yields higher.
But if she plays her cards right, then the meeting decision and press conference today should be relative non-events for markets. And come what may, the lack of fireworks will very much let us know that Lagarde has done a good job in terms of managing market expectations.
This article was written by Justin Low at investinglive.com.