Investing.com - This Thursday the markets are trading lower -Ibex 35, CAC 40, DAX...- pending at 14:15 Spanish time the ECB's interest rate decision. The ECB is expected to leave rates unchanged at 4.50%.
At 14:45 it will be the turn of Christine Lagarde's press conference, president of the ECB.
"We expect rates to remain unchanged (deposit 4.0%, repo 4.5%), for the first time after more than a year of hikes, and in a context of continued moderation in Eurozone CPI in September (headline 4.3% YoY, core 4.5% YoY) after +450 bps of rate hikes since July 2022, and awaiting new data and the update of the macro picture at the meeting on 14 December", explained Renta 4 (BME:RTA4).
According to the fund manager, the consensus is discounting that the ECB has already reached the rate ceiling (only a 10% probability of an additional +25bp), based on:
1) the market is doing its job of monetary tightening with the notable rebound in IRRs (10-year IRRs +25bp, +30bp and +50bp in Germany, Spain and Italy, respectively, since the ECB meeting of 14-September in which it raised rates +25bp);
2) rate hikes are already being passed on to the real economy (negative October PMIs in the Eurozone at the beginning of the week and a bank lending survey that points to monetary tightening being adequately passed on to the real economy, expected to peak in early 2024).
Lagarde, the key
"Even so, we expect the ECB to maintain a hawkish bias in its speech, not closing the door to additional rate hikes if necessary and probably referring to balance sheet reduction, with the aim of safeguarding its credibility in the fight against inflation," warn Renta 4.
"In this regard, we will have to continue to monitor the persistent pressure on services and food prices, in addition to an increasingly complicated energy context (risk of intensification of the geopolitical conflict in the Middle East that delays the return to the 2% inflation target from 2025 to 2026)," they add.
"The focus will be on what the Council's communiqué implies and what Lagarde says about future actions, not only on rates, but also in relation to two issues that have been talked about a lot lately: i) the increase in the percentage of required reserves that banks must keep at the ECB, and ii) the possibility of accelerating the process of reducing the size of the ECB's balance sheet, something that could entail not reinvesting the bonds in the portfolio at maturity," agree Link Securities.
"While we do not expect any action on either issue at this Council meeting, we are sure that Lagarde will be asked about it at the press conference. The reaction of the markets will depend on the more or less aggressive monetary policy stance adopted by the Council in its communiqué and on how Lagarde subsequently communicates it", these analysts add.
When will interest rate cuts be implemented?
"All this could delay the start of rate cuts (the market is currently discounting the start of cuts for June 2024). We expect the ECB to reiterate its commitment to tight interest rates for a sufficient period of time to bring inflation back to its target," Renta 4 concludes.
"Lagarde will offer a hawkish/harsh tone so as not to encourage expectations of rate cuts in the face of still excessive inflation (+4.3%) and upside risks. This will keep bond yields tight, with the consequent restrictive impact on the economy and inflation", according to Bankinter (BME:BKT).
"The key will be how aggressive the dialectic will be. In addition, it could announce some measure reducing the remuneration of the excess liquidity that banks have deposited with the ECB", these experts conclude.
Translated from Spanish using DeepL.