ECB Preview: A “Good Place” Leads To No Cut

Courtesy of Newsquawk

Summary

• ECB policy announcement due Thursday October 30th at 13:15GMT/09:15EDT
• Expectations are for the ECB to stand pat on the Deposit Rate at 2.0%
• The lack of material economic developments since September has set the meeting up as a non-event

OVERVIEW: With the ECB viewing policy as being in a “good place” and a lack of material economic developments since the September meeting, the upcoming announcement is expected to be a non-event. There are several risks surrounding the Eurozone economy, however, absent a material escalation, policy is priced to be on hold for the foreseeable.

PRIOR MEETING: As expected, the ECB opted to stand pat on policy by holding the Deposit rate at 2.0%. Also in-fitting with consensus, the statement reiterated that policymakers will maintain their meeting-by-meeting and data-dependent approach, whilst not pre-committing to a particular policy path. As such, attention turned to the accompanying macro projections, which saw the 2026 inflation forecast only revised up to 1.7% from 1.6%; consensus looked for a more notable upgrade to 1.9%. This elicited a dovish reaction in markets with the forecast suggesting that the ECB may need to loosen policy further in order to avoid a policy undershoot. However, at the follow-up press conference, Lagarde caused an unwind of some of this initial price action after noting that minimal deviations from target will not necessarily justify movement. Other hawkish elements of the press conference came via the upgrade to the ECB’s risk assessment, with risks now seen as more balanced vs. previous guidance of “tilted to the downside”. Furthermore, Lagarde stated that the disinflationary process was over and policy is in a “good place”.

RECENT ECONOMIC DEVELOPMENTS: September HICP inflation ticked higher from 2.0% to 2.2%, core inflation advanced to 2.4% from 2.3% and services rose to 3.2% from 3.1%. However, writing at the time, ING noted the increase in the headline print was mainly due to energy effects, which are expected to fade. The ECB’s September Consumer Expectation Survey saw the 1 yr inflation forecast slip to 2.7% from 2.8% with the 3yr holding steady at 2.5%. In terms of market gauges of inflation, the 5y5y inflation forward has slipped to 2.06% from circa 2.09% at the time of the September meeting. From a growth perspective, Q3 GDP data is not released until the morning of the announcement. However, more timely survey data from S&P Global saw the October manufacturing PMI rise to 50.0 from 49.8, services increase to 52.6 from 51.3, leaving the composite at 52.2 vs. prev. 51.2. In the accompanying report, it was observed that economic growth in the eurozone, even though accelerating a bit, has been much weaker than it otherwise could have been due to the soft performance of the French economy. In the labour market, the unemployment rate remains just above the historic low @ 6.3%.

UPCOMING MEETING: The ECB is expected to maintain policy conditions in October, with all respondents to Reuters forecasting an unchanged outcome and market pricing implying just a 2% chance of a cut from the current 2.00% Deposit Rate. As stated above, the messaging from the prior meeting was one of policymakers viewing policy as being in a “good place”. Since economic conditions have not changed since September and there are no accompanying macro projections, the upcoming confab is expected to be a non-event. More specifically, ING writes that reasons for an uneventful announcement are due to 1) little new information available. 2) No pressing urgencies given that the French political situation has not escalated. 3) Doves and hawks are keeping their powder dry until December (which will see the debut 2028 forecasts). For December, markets price just 1 bp of loosening. However, ING writes that downside risks still remain, with the risk of “a delayed adverse impact of US tariffs, the stronger euro exchange rate, French politics or a delay in Germany’s fiscal stimulus.” The desk adds that if any of these materialise, ” we can expect the ECB to engage in one or two more rate cuts”.