ECB set to raise rates by 75bps and could announce policy adjustments to address issues relating to excess liquidity and collateral scarcity
The main focus today will be the ECB’s latest monetary policy announcements. While yesterday’s decision by the Bank of Canada brought a surprise with a slowing in the pace of tightening to 50bps, there is unlikely to be a similar moderation from the ECB. Instead, the Governing Council seems bound to raise each of its three main policy rates by 75bps, most notably taking the deposit rate to 1.50%. With euro area inflation in September having again exceeded the ECB’s forecast, and the euro having depreciated significantly below parity against the dollar since the last monetary policy meeting, all members of the Governing Council will agree that real short-term rates are still far from the neutral stance that they hope to achieve by year-end.
So, while a dovish minority will be mindful of rising recession risks and tightening financial conditions, another hike of 75bps this month is likely to be uncontroversial. While the post-meeting statement will likely repeat that future policy decisions will continue to be data-dependent and made on a meeting-by-meeting basis, it will also likely make clear that rates will likely rise again before year-end. And President Lagarde might make clear that the ECB will consider reducing its bond holdings (i.e. quantitative tightening) once interest rate normalisation has been completed.
But while the rate decision seems unlikely to bring a surprise, it is possible that the ECB might also announce technical adjustments to address issues related to the huge amount of excess liquidity, which now offers banks significant risk-free income while also representing a big cost to the ECB and a source of pressure on collateral availability. Several policy options seem to have been under consideration. In particular, to sharpen banks’ incentives to repay their TLTRO loans without undue delay, it is possible that the Governing Council might decide retrospectively to amend the terms of that long-term liquidity. That, however, might have a reputational cost for the ECB. Alternatively, the ECB might simply introduce a ‘reverse-tiering’ system to reduce interest paid on deposits above a certain threshold. Such measures, of course, would likely reduce total net income for euro area banks by tens of billions of euros in the coming year. And market participants would prefer targeted measures to address the collateral shortage, such as issuance of sterilisation bills by the ECB and/or a Fed-style reverse repo facility.
German consumer confidence ticks slightly higher, but remains historically low
Like yesterday’s French INSEE survey results, today’s German GfK consumer confidence indices suggested some stabilisation in sentiment at the start of Q4. However, confidence still remains close to a historically weak level and consistent with declining consumption. In particular, the headline sentiment index rose 0.9pt to -41.9, the second-weakest reading on the series, to be trending more than 10pts lower than the Q3 average and almost 43pts below the level a year ago. Despite double-digit inflation, consumers were somewhat less downbeat about their income expectations, although the relevant survey gauge (up more than 7pts to -60.7) only partly reversed the slump in September and was still some 84pts lower than a year earlier. So, after eight consecutive declines, households’ willingness to buy improved very slightly in October, albeit the index was still trending some 1pt below the Q1 average and suggestive of ongoing drag on growth from consumer spending. Looking ahead, the latest Italian ISTAT consumer and business surveys are due later this morning.
UK CBI survey likely to suggest another tough month for retailers in October
In the UK, today will bring the CBI distributive trades survey for October. Given the further rise in household energy bills this month, surge in secured and unsecured interest rates, and double-digit inflation, this survey is highly likely to signal ongoing weakness in retail sales at the start of Q4.
US GDP to have rebounded in Q3 thanks to a strong contribution from net trade
In the US, today brings the first estimate of Q3 GDP. Despite weak construction and only moderate growth in consumer spending and business investment, our colleagues in Daiwa America expect GDP to have been boosted by a strong contribution from net trade. Admittedly, yesterday’s monthly goods trade numbers suggested a smaller contribution than initially expected, albeit likely still boosting growth by more than 2½ppts. Overall, GDP growth looks likely to be around 2%Q/Q annualised, after two negative quarters in the first half of the year.