Euro: Outlook remains mixed amid ECB deliberations on energy shock – Commerzbank

The Euro’s outlook after December depends on energy prices and possible second-round effects on wages and inflation expectations, according to Norman Liebke at Commerzbank. The ECB’s widely anticipated decision to hold rates came as Christine Lagarde kept open the possibility of another increase in December, a move already largely priced in by markets. With higher bond yields already tightening financing conditions, the room for a prolonged rate-hiking cycle is limited.

Could the ECB raise rates again in December after its pause?

"The ECB delivered the largely expected pause at yesterday’s meeting. However, ECB President Christine Lagarde made it clear that, in light of higher energy prices, the Governing Council had indeed discussed another rate hike. She also left the door open to a third rate increase this year in December."

"Our economists also expect a rate hike at the end of the year. However, the message contained little that was new for markets, as a December hike is already largely priced in and rate expectations changed only marginally following the meeting."

"For the euro, therefore, the more important question is likely to be what happens after December. Much will depend on energy-price developments."

"As things stand, the ECB will probably have to revise its oil and gas price assumptions from the September projections higher in December. The key question, however, is whether the energy-price shock also feeds through to underlying inflation."

"For the euro, the picture therefore remains mixed: if energy prices remain high and signs of second-round effects increase, the market could once again price in more rate hikes, benefiting the euro. If, by contrast, price pressures remain largely confined to energy, the bar for further rate hikes after December is likely to remain high and the euro’s additional upside potential limited, especially as energy inflation is likely to partly decline again next year due to base effects."

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