Russell Silberston, Ninety One – ECB expectations

by | Sep 12, 2023

Russell Silberston, Investment Strategist at Ninety One

ECB watchers have been spoilt in recent years by very clear forward guidance on the direction of interest rates. However, after an historically fast tightening cycle, and a switch to data dependence at their July meeting, President Lagarde stated the Governing Council is no longer ‘in the domain of forward guidance.’ Rather policy will be set to ‘ensure that the key ECB interest rates will be set at sufficiently restrictive levels for as long as necessary.’ Perhaps no surprise, therefore, that markets and economists are split on the outcome of this week’s Governing Council, with 55% of economists expecting no change and 45% a 0.25% hike, whilst markets are priced for a 40% probability of a hike.

On balance we expect no change as economic data has been weak and money supply, an indicator the German Bundesbank has watched closely in the past, turned negative in the latest release. Inflation surprised to the upside last month, but our interpretation of this is that the numbers are driven by the bounce is driven mostly by the bounce in commodity prices. If the economic outlook is as lacklustre as we believe, then core inflation will fall back.  With official rates already back to their pre-GFC levels and the economy flirting with recession, monetary policy is already restrictive and the Governing Council can afford to be patient and hold fire this month.

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