ECB September Rate Hike Remains Base Case, Says TD Securities

TD Securities maintains that a 25-basis-point rate hike by the European Central Bank (ECB) in September remains the base case, according to a note released on Tuesday. The firm’s analysts point to persistent underlying inflation and hawkish commentary from policymakers as key drivers behind this expectation.

Why TD Securities Expects Another Hike

The decision by TD Securities to keep a September hike as its baseline scenario is grounded in the ECB’s ongoing battle against inflation, which, although moderating, remains above the bank’s 2% target. The central bank has already raised rates at its past nine meetings, and recent statements from Governing Council members suggest a continued bias toward tightening, despite growing concerns about economic growth.

TD’s outlook also factors in the resilience of the euro area labor market and the gradual pass-through of earlier rate increases to the real economy. The firm acknowledges that the path is data-dependent, but as of now, the balance of risks points to another move in September.

Market Implications and Euro Impact

If the ECB delivers a hike in September, it would likely provide short-term support for the euro, which has been sensitive to interest rate differentials with the US dollar. However, the impact may be muted if the central bank signals that this could be the final hike of the cycle.

Investors are also watching the ECB’s updated staff projections, which will be released at the September meeting. These forecasts could influence the bank’s forward guidance and shape market expectations for the remainder of the year.

What This Means for Borrowers and Savers

For consumers and businesses in the euro area, another rate hike would translate into higher borrowing costs, affecting mortgages, corporate loans, and government debt servicing. Conversely, savers might see slightly better returns on deposits, though banks have been slow to pass on the full extent of rate increases.

The ECB’s policy path is crucial for the region’s economic outlook, as overly aggressive tightening could exacerbate a slowdown, while premature easing risks entrenching inflation.

Conclusion

TD Securities’ view aligns with the broader market consensus, which currently prices in a roughly 60% probability of a September hike. However, the final decision will hinge on incoming data, particularly inflation figures and economic activity indicators. As always, the ECB retains flexibility, but for now, the base case remains clear: another increase in September.

FAQs

Q1: When is the next ECB meeting?
The next ECB monetary policy meeting is scheduled for September 14, 2023, where the Governing Council will announce its interest rate decision.

Q2: What is the current ECB deposit rate?
As of the last meeting in July 2023, the ECB raised its deposit rate to 3.75%, the highest level since 2008.

Q3: Could the ECB pause its hiking cycle after September?
Yes, if inflation continues to decline and economic data weakens, the ECB may signal a pause after September. However, any decision will be data-dependent and subject to change.