The European Central Bank (ECB) raised its key interest rate by 25 basis points to 2.50% in September, a move described by President Lagarde as a 'no-brainer' [1]. According to Deutsche Bank analysts led by Mark Wall, the ECB's tone remains hawkish, with core inflation projected to be 30 basis points above target at the end of the forecast horizon [1]. This projection suggests that the tightening cycle is not yet complete, and Deutsche Bank maintains its expectation for another rate hike to a terminal rate of 2.75% in December [1].
President Lagarde balanced her hawkish stance by emphasizing the ECB's commitment to a 'data-dependent, meeting by meeting, no precommitment' approach, refraining from repeating previous statements about the market's understanding of the ECB's reaction function [1]. She also noted that the Governing Council was not taking a view on the direction of policy going forward, reinforcing the ECB's flexible stance [1].
Risks to the rate path are described as two-sided. If economic data weakens, the ECB could pause at 2.50%, especially if high energy prices lead to demand destruction [1]. Conversely, if growth remains resilient, neutral rates rise, and energy prices stay elevated, rates could potentially rise above 2.75%, possibly reaching 3% or higher, although there is currently no compelling evidence of second-round or indirect effects [1].
Overall, the market implication is that the ECB remains on a hawkish path, but future moves will depend on incoming economic data, particularly regarding inflation persistence and energy prices [1].
CONCLUSION
The ECB's September rate hike and hawkish tone signal a likely further increase to 2.75% in December, according to Deutsche Bank. However, the central bank remains data-dependent, with future policy moves contingent on economic developments, especially inflation and energy prices.