Danske Markets expects the ECB to hold its deposit rate at 2.50% on Thursday 29 October and to hike in December. It also flags a possible change to banks' minimum reserve requirement as a point to watch.
Danske Markets expects the ECB to keep policy rates unchanged at its meeting on Thursday 29 October, with the deposit rate at 2.50%, in line with consensus and market pricing. Inflation rose to 3.7% y/y in September, above expectations, yet Danske says the spillovers from energy costs to underlying inflation remain very muted.
Why Danske dropped its October hike call
Firms' selling price expectations in services and retail even declined, according to Danske. The bank therefore believes the ECB is not in a hurry to hike policy rates as early as October and prefers to wait until December, when it will have more data and new projections.
Danske also changed its call after comments from Governing Council members since the September meeting turned less hawkish than Lagarde's press conference remarks. Lagarde focused clearly on energy costs, while more recent comments increasingly also consider demand destruction and the lack of inflationary second-round effects.
December hike and the peak rate
In its new baseline, Danske expects a final 25bp hike in December, leaving a peak deposit rate of 2.75% that stays in place in 2027. Higher energy costs, the lagged effects of earlier hikes and a tightening fiscal stance are set to weigh on growth, which should keep the ECB from hiking further.
However, Danske sees upside risks from energy costs and low gas storage levels, so it considers a fourth hike to 3.00% more likely than staying at 2.50%. Even then, it expects the ECB to hike less than the 75bp of tightening priced by markets.
For Thursday, Danske expects Lagarde to keep full flexibility and offer no firm guidance, so the market reaction stays limited. It will also watch whether she officially announces an early departure.
Possible lift to minimum reserves
Over the summer, reports citing ECB sources said the ECB was considering lifting banks' minimum reserve requirement from 1% to 2% to reduce its own losses. Danske says this would push repo rates higher and could let the ECB end QT slightly earlier, as excess liquidity would drop by around EUR 175bn.
Given recent stress in the funding market and because liquidity conditions tend to tighten over year-end, Danske considers it plausible that any change would not take place until next year, even if announced on Thursday. The bank says the macroeconomic effect on growth and inflation is marginal.
Source: ActionForex
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