ECB, rate cut expected in September
As widely expected, the ECB kept all three unchanged monetary policy rates at its July meeting. The deposit rate thus remains at 3.75% after the cut in June. The central bank continues to believe that current rates are helping to reduce inflation and that monetary policy is keeping financing conditions under control.
Future decisions will continue to ensure that the interest rates remain “sufficiently restrictive for as long as necessary”. Of course, the ECB will not commit to a particular rate-cutting path and will continue to be data-driven. Overall, it was a fairly neutral and noncommittal press conference.
Our baseline scenario is for a cut in September. In this sense, we do not believe that September is necessarily “wide open”. In fact, a cut of 80% is expected for September. We believe that the next data should confirm the disinflationary narrative and allow for a cut at the next meeting.
Along with the growing likelihood of a cut by the Fed (with “global drivers” dragging yields down), let’s look at the yields of Bund declining over the second half of the year, with a year-end target of 2.25%. This keeps us constructive on euro area duration.
The EGB spread (excluding France) remain relatively solid, with the BTP-Bund 10 years that have returned to tight levels. The policy of QT It was communicated transparently with predictable implementation.
Supply also continues to be well absorbed and pressures are easing in the summer months. We continue to see potential localised volatility in spreads OAT Bundwhich remain vulnerable to the French budget and government formation processes.
* Head of Developed Market Debt Sovereign Research
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