ECB 'not assigning too much importance' to neutral rate, December hike now more likely

On the surface, yesterday’s ECB communications were non-committal though clearly there were underlying hawkish undertones. Both the near-term growth and inflation forecasts were revised up, and Lagarde warned that the risk of inflation staying elevated next year had increased.

Her remark that downplayed the significance of the “neutral” rate seems very significant to us. Any additional hikes from here would, by the Chief Economist Lane’s own definition, take policy into “restrictive” levels, so the fact that the ECB is not assigning too much importance to this suggests that the bar for further hikes is not particularly high.

We still contend that further hikes are neither not particularly warranted nor wise given the risks to growth and public finances. Yet we now concede that another - possibly final - hike in December is more likely than not, particularly after the infamous ECB “sources” confirmed after the meeting that officials expect more hikes, probably in December, but potentially in October too.

EUR/USD traded modestly lower in the immediate aftermath of the decision, though if anything yesterday’s meeting could pave the way for some modest near-term upside in the pair.