ECB Raise Rates by 75 bps
The ECB yesterday raised interest rates by 75 bps today which was widely expected and the ECB expects to raise interest rates further but they have no removed forwards guidance on rate rises and will look at the outlook on a meeting-by-meeting basis.
The ECB noted that the Governing Council has made substantial progress in withdrawing monetary policy accommodation, while it dropped the part from September saying over the next several meetings the Governing Council expects to raise interest rates further.
ECB Interest Rate Expectations
The dropping of forward guidance was accompanied by the ECB the removal of language from the previous statement which indicated "several" rate hikes in the future. More than a full 25bp rate hike from the market-implied rate path for interest rates has been removed from market pricing with the ECB deposit rate now seeing as peaking at 2.7% vs. 3.2% a week ago.
We are at 1.5% in terms of the current interest rate so the market sees 1.25% more to come but we think this is optimistic and expect a lower peak at 2.00% with a final hike coming in December.
ECB President Christine Lagarde in her press conference mentioned the word “recession” and stressed that incoming data and the next staff projections at the December meeting would be important which could lead to a dovish pivot at the December meeting.
The EU Economy Recession
The zone has huge problems in terms of the economy and the euro requires concerns about growth to ease in order to strengthen but the zone is in recession.
Raising rates much further won’t tame inflation which is running at 10% mostly due to an energy supply shock, not from the demand side so normalizing rates makes sense but going into restrictive territory does not.
The ECB will hope gas prices come down and the economy stabilizes but the eurozone is ready in recession and gas prices are likely to remain elevated throughout 2023. Leading economic indicators are down and look set to fall further.
The big 1.000 level has held the rally and we expect a move down to 0.9600 which is daily support then on to monthly support at 0.9000.