MFS: ECB holds, but one more rate hike likely in December
Annalisa Piazza, Fixed Income Specialist at MFS Investment Management, comments on yesterday's ECB meeting:
The ECB left policy rates unchanged at 2.5% at today’s meeting and the tone of the press release and conference was more dovish than the market expected, representing a meaningful shift relative to September, particularly in its assessment of financial conditions and the risks to growth.
However, we would not interpret it as a signal that the ECB is preparing to reverse its tightening cycle. In our opinion, the ECB is moving from a relatively straightforward inflation-fighting narrative towards a more balanced assessment of the trade-off between persistently high energy inflation and deteriorating financing conditions.
The key shift is the ECB’s explicit acknowledgement that tighter financial conditions are already reinforcing its policy stance, raising the bar for further rate rises even as the energy shock proves more persistent. The debate is moving from how much higher rates need to go to how long they need to stay restrictive.
Our base case remains one final hike in December, taking the policy rate to 2.75%, but it is not a done deal: it hinges on underlying inflation and wage dynamics showing renewed persistence. Absent that, tighter financing conditions and downside risks to growth would argue for an extended pause. Either way, the cycle looks close to its peak, with rates likely to stay on hold until the Governing Council is confident that inflation is converging durably towards target.
On spread widening, Lagarde was deliberately vague, attributing the rise in yields to a broadbased move at the long end across all curves and to the risks stemming from higher energy prices (i.e. higher fiscal spending). That said, she made clear that, should wider spreads impair monetary policy transmission, the ECB has all the tools necessary to address that risk.