European Central Bank: Hawkish rate path supports Euro – UOB

UOB economist Lee Sue Ann notes that the European Central Bank (ECB) delivered a widely expected 25 bps hike but signalled a more hawkish stance as inflation risks from the Middle East-driven energy shock remain elevated. UOB now expect another 25 bps hike, most likely in Dec, with Oct described as a live meeting.

ECB tightening bias under energy shock

"The European Central Bank (ECB) delivered a widely expected 25 bps hike, but the message was more hawkish than the move itself. Policymakers stressed that the Middle East-driven energy shock continues to generate inflation pressures, with risks tilted to the upside for inflation despite increased uncertainty around growth."

"We no longer see the ECB as firmly on hold after Sep. While Dec remains our base case for one final 25 bps hike, Oct has clearly become a live meeting given persistent energy-driven inflation risks and growing concerns over second-round effects through wages and underlying prices."

"The ECB raised its three key policy rates by a further 25 bps at its 10 Sep meeting. Accordingly, the interest rates on the deposit facility, main refinancing operations and marginal lending facility were increased to 2.50%, 2.65% and 2.90%, respectively. The decision was widely anticipated and reflected the Governing Council’s assessment that the Middle East conflict continues to generate inflationary pressures and that inflation is likely to remain above target for an extended period."

"As such, while Oct has become a live meeting, our base case is for the ECB to pause next month before delivering one final 25 bps hike in Dec, taking the deposit rate to 2.75%. The key risk to this view is a further escalation in energy prices or clearer signs that second-round effects are becoming entrenched, which could compel the ECB to move sooner."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)