ECB leaves door open to December hike as Lagarde 'downplays neutral rate'

The ECB struck a noncommittal note on the surface today, though with clear hawkish undertones. Lagarde confirmed that the Governing Council did not discuss the path of rates at today's meeting, reinforcing the sense that all options remain on the table.

Notably, she also downplayed the significance of the "neutral rate" – the theoretical level at which monetary policy is neither expansionary nor contractionary. After raising rates today, the deposit rate now stands at the upper bound previously indicated by Chief Economist Lane. According to Lagarde, decision-makers are ‘not attaching great importance to [it]’. This suggests the Governing Council may be less wary of raising rates beyond this month’s meeting, and that the bar for additional hikes is perhaps not as high as we had previously anticipated.

Despite our concerns over the impact of higher rates on the Euro Area economy and the bloc’s public finances, we're revising our view, and now think that another, possibly final, hike in December is more likely than not, particularly with a peace deal off the table until after the US midterms.