During the press conference Lagarde was asked whether it was more likely that the next move would be a hike relative to a cut, referencing Schnabel’s recent interview. Lagarde did not answer the question directly and instead said that the consensus in the ECB was that all options remained open and that they stick to a meeting-by-meeting approach. In our view, this highlights that the consensus in the Governing Council is clearly less hawkish compared to Schnabel especially due to diverging views on the inflation outlook. At the same time, Lagarde also said that she would not give forward guidance by commenting on market pricing given that uncertainty is still very high. The fact that she is referring to high uncertainty implies that staff projections play a smaller role in deciding current policy changes like we saw in September. Lagarde’s descriptive comments on the economy and decision not to agree with Schnabel’s view led to a fading of the initial rise in rates following the hawkish staff projections. Hence rates ended the meeting flat and EUR/USD little changed as we expected.
We maintain our call that the ECB will leave the deposit rate unchanged at 2.00% throughout both 2026 and 2027. Higher than expected activity and wage growth has reduced the need for cuts in 2026 while our expectations of a clear undershooting of inflation the comings years should keep the ECB from hiking in 2027. We have liked our paying bias the past months also supported by recent data. While we cannot exclude that rates can continue to move slightly higher in the very near-term, we are increasingly attentive to the risk-reward skew on a 1–3-month basis to start to favour receivers.