PIMCO: ECB is heading towards a December hike
Konstantin Veit, Portfolio Manager at PIMCO, comments on yesterday's ECB meeting:
On today’s rates decision:
- Today’s decision by the ECB to hold the deposit facility rate (DFR) at 2.5% was widely expected.
- The market currently expects around three additional ECB rate hikes, for a terminal rate of 3.25%.
- We believe risks are skewed towards fewer hikes but acknowledge exceptionally high uncertainty.
- In our baseline we expect the ECB to hike in December, entering marginally restrictive policy territory.
- The ECB’s main concern centers around higher energy prices becoming embedded in inflation.
- Looking at the inflation picture today, it features higher inflation but no signs yet that it is becoming embedded.
- This suggests that the ECB remains in the “middle path” for monetary policy, which continues to warrant a measured response to the surge in energy costs.
- Only once the ECB judges inflation to deviate significantly and persistently from target, can its response be expected to take a more forceful turn.
On Christine Lagarde’s announcement that she will step down:
- While Christine Lagarde’s decision to step down from her role early was expected, it is as yet unclear who will succeed her.
- A range of possible candidates is now under consideration, including Knot and de Cos, although it’s still too early to know what the final candidate line-up will be.
- Our expectation is the preference will be for a centrist candidate who reflects the inclusive and consensual leadership style shown by Lagarde.
- We note the ECB’s strong focus on a framework approach, as reaffirmed at the 2025 monetary policy assessment, which tends to reduce individual influence. The reaction function is clear and unlikely to change.
- Subsequently, we do not anticipate significant investment implications stemming from Lagarde’s departure.