ECB as Expected Lifted Key Policy Rates by 25 bps

Markets

The ECB as expected lifted its key policy rates by 25 bps. The deposit rate now stands at 3.5%. The opening statement starts with the observation that inflation has been coming down combined with the confession that it is projected to remain too high for too long. Inflation forecasts faced a new upward revision compared to March. Changes to the headline figure are tiny: 5.4% for this year (from 5.3%), 3% next year (from 2.9%) and 2.2% for 2025 (from 2.1%). This hides a forceful increases in underlying core inflation though, which is the needle in the ECB’s compass: 5.1% for this year (from 4.6%), 3% for next year (from 2.5%) and 2.3% (from 2.2%) for 2025. In both cases, the ECB doesn’t expect inflation to drop sustainably to/below its 2% inflation target. Upside risks to inflation remain via both energy/food (Russia-related), wage agreements and rising inflation expectations while lower demand could have a dampening effect. The Governing Council remains inclined to extend its tightening cycle. Future decisions will ensure that key rates will be brought to levels sufficiently restrictive to achieve a timely return of inflation to the 2% medium-target and will be kept at those levels for as long as necessary. Higher for longer is also for the ECB the key message. “Are we done? Have we finished the journey? No we’re not at our destination! We have more ground to cover! In the base scenario, we will hike the policy rate again by 25 bps in July.” ECB President Lagarde didn’t want to namedrop the September meeting yet, given the updated monetary policy report they’ll be receiving by then. “The terminal rate is something we’ll now once we’ll get there. The ultimate goal is bringing inflation down to 2%”. All else equal, we believe another 25 bps rate hike is our base case. To take attention away from the upwardly revised inflation path, the ECB said that past rate increases are being transmitted forcefully, that growth in loans is slowing and that tighter financial conditions will increasingly dampen demand.

European and US yields were rising in the wake of yesterday’s hawkish skip by the Fed and following the upward ECB CPI revisions. During the Q&A session, the tide turned completely. ECB Lagarde kept to the expected script (she had already pre-announced the July move back in May) but we think that especially mixed US eco data are to blame. Rising weekly jobless claims (2^nd week running) left a sour taste while import and export prices fell faster than expected. EUR/USD accelerated its upleg, closing in on 1.09. US Treasuries outperform German Bunds.

News & Views

Dutch TTF gas prices (€42/MWh) since June have started to bottom out from the lowest levels since April 2021 between €20-25/MWh. Air-conditioning demand has risen sharply as Europe continues to be in the grip of a heatwave. Today’s price surge of more than 30% at some point, however, was supply driven. The Netherlands is set to close Europe’s biggest gas field from October 1, Bloomberg reported citing sources. The field has been a critical source of gas, especially since Russia basically cut off all supplies in response to western sanctions. Closing it means one option less to ramp up flows should the energy crisis resurface next winter. The decision isn’t fully irrevocable though, the people said. In case of high need, wells can be reopened in about two weeks. The gas field has long been controversial as its extraction caused earthquakes and damaged homes in the area. PM Rutte just one week ago narrowly survived a vote of no-confidence with his handling of the topic at the center of the debate.

Switzerland’s State Secretariat for Economic Affairs (SECO) said consumer prices will rise 2.3% this year, after 2.8% in 2022. The new prediction is a tad lower than the 2.4% in March but nevertheless above the 2% target of the Swiss National Bank. It sees inflation easing to 1.5% in 2024 while the economy should grew at a 1.1% and 1.4% clip this year and the next. The Swiss National Bank meets next week (June 22). Its president Jordan was quoted in an interview published last Saturday as saying that the fight against inflation is not over yet and further tightening of monetary policy cannot be excluded. The SNB has raised the policy rate from -0.75% to 1.5% currently. Markets expect at least a 25 bps move next week with a 40% chance discounted for a hike double that size. On the Swiss franc, Jordan said the SNB has already allowed CHF to strengthen but he doesn’t want it “to appreciate too much”. EUR/CHF since May traded a tight range between 0.97/0.98.