ECB preview: could markets and/or politics disrupt the ECB’s soft landing? – SocGen


Anatoli Annenkov of Société Générale notes that threats to the Eurozone's "soft landing" economic outlook loom over the horizon, as well as upside risks to inflation. 

On Our Minds: Euro Area

Having mainly used the short-term policy rate to tighten policy, the increases seen at the long end of the yield curve since the last meeting seem increasingly important for the ECB... the ECB should be on hold for now until clearer visibility emerges over the outlook, possibly not before March next year.

Last month, the ECB surprised us by suggesting that no further rate hikes might be needed, even before a clear turnaround in core inflation and without having a defined tool to communicate an expected rate path... We have long been concerned about the limited transmission of tighter policy to the long end of the yield curve, supported by tepid QT.

Long-term bond yields continued to rise after the September meeting. The Bund was up by nearly 40bp until early October, driven by a combination of a supply/demand mismatch, inflation concerns and fears of ‘higher-for-longer’.

The rise, and risk of further increases, in long-term yields is likely to quell calls for more policy tightening in the near term. Moreover, data have mostly supported the planned pause in tightening.

The next set of data on the state of the economy will only be available after the October meeting (full set of 3Q GDP by early December) and with core inflation widely expected to continue moderating this autumn, the March ECB staff projections next year may be the next best time to assess the outlook.

The ECB has generally downplayed QT as a tool for fighting inflation but as policy normalises, we see slightly higher QT flows next spring (ending full reinvestments of the PEPP), after the review of the operational framework. 

Moreover, to dampen the political backlash from rising losses over the coming years, we suspect that the ECB may agree to raise the minimum reserve requirement next year, with the impact on overnight rates determining by how much. Even with that, mounting losses will be a political/public image challenge for the ECB for some years.

Share: Feed news

Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.

If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.

FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.

The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.

Recommended content


Recommended content

Editors’ Picks

EUR/USD clings to daily gains above 1.0650

EUR/USD clings to daily gains above 1.0650

EUR/USD gained traction and turned positive on the day above 1.0650. The improvement seen in risk mood following the earlier flight to safety weighs on the US Dollar ahead of the weekend and helps the pair push higher.

EUR/USD News

GBP/USD recovers toward 1.2450 after UK Retail Sales data

GBP/USD recovers toward 1.2450 after UK Retail Sales data

GBP/USD reversed its direction and advanced to the 1.2450 area after touching a fresh multi-month low below 1.2400 in the Asian session. The positive shift seen in risk mood on easing fears over a deepening Iran-Israel conflict supports the pair.

GBP/USD News

Gold holds steady at around $2,380 following earlier spike

Gold holds steady at around $2,380 following earlier spike

Gold stabilized near $2,380 after spiking above $2,400 with the immediate reaction to reports of Israel striking Iran. Meanwhile, the pullback seen in the US Treasury bond yields helps XAU/USD hold its ground.

Gold News

Bitcoin Weekly Forecast: BTC post-halving rally could be partially priced in Premium

Bitcoin Weekly Forecast: BTC post-halving rally could be partially priced in

Bitcoin price shows no signs of directional bias while it holds above  $60,000. The fourth BTC halving is partially priced in, according to Deutsche Bank’s research. 

Read more

Week ahead – US GDP and BoJ decision on top of next week’s agenda

Week ahead – US GDP and BoJ decision on top of next week’s agenda

US GDP, core PCE and PMIs the next tests for the Dollar. Investors await BoJ for guidance about next rate hike. EU and UK PMIs, as well as Australian CPIs also on tap.

Read more

Forex MAJORS

Cryptocurrencies

Signatures