Ms Schnabel noted that, since the Governing Council’s previous monetary policy meeting on 14-15 June 2023, the narrative in global financial markets had shifted from a “higher-for-longer” scenario for inflation to growing optimism on a disinflation scenario. The increasing divergence of economic data between the euro area and the United States and the elevated sensitivity of euro area asset prices, especially to US data surprises, made the interpretation of market data challenging and could cause rapid shifts in market narratives.
Following the previous monetary policy meeting, central bank communication, high UK inflation releases and strong US economic data had initially driven the euro short-term rate (€STR) forward curve higher. This upward shift had then been partly reversed in the euro area in response to the release of the US Consumer Price Index (CPI) on 12 July as well as lower than expected Purchasing Managers’ Indices (PMIs) for the euro area. Looking through this volatility, the latest €STR forward curve still stood above the levels observed before the Governing Council’s previous monetary policy meeting. The market was pricing in one more 25 basis point rate hike at the present meeting, a 56% probability of an additional 25 basis point hike in September 2023 and a peak deposit facility rate of 3.94% by the end of the year.
Market pricing was broadly in line with the results of the ECB Survey of Monetary Analysts as well as the Reuters and Bloomberg surveys, with the latter polls – conducted after the US CPI release – showing a slight majority foreseeing another rate hike in September 2023 and a peak deposit facility rate of 4%. Looking at how the recent upward shift in market expectations Page 2 of 25 for the ECB’s peak rate had been related to expectations of subsequent rate cuts, no clear correlation was observed between the expected peak rate and cumulative rate cuts priced in by the end of 2024.
