INFLATION
The near-15% rally in Brent crude futures since September 10th has driven a 20bp rise in the EUR 5y5y inflation swap from 2-year lows. The swap was last at 2.2076%, after printing a low of 2.0147% on September 12.
- The ECB will likely look through this recent uptick at next week’s October decision, given the volatility of oil prices in the current geopolitical environment (it also looked through the significant decrease in market implied inflation expectations over the summer months).
- A 25bp cut at next Thursday’s decision is widely expected by analysts and over 90% implied by ECB-dated OIS.
- A cut would reflect increasing concerns around the Eurozone growth outlook (following the weak September flash PMIs) and confidence in inflation returning to target in a timely manner (following the soft September flash inflation data). As such, President Lagarde will argue it as consistent with the bank’s “data dependent and meeting-by-meeting approach”.
- However, focus will be on to what extent the ECB’s communication balances developments in spot growth/inflation outcomes with medium-term considerations.
- A reminder that the ECB has invested significant intellectual capital into analysing the interrelationship of wages, profits and productivity as a key determinant of inflation and in turn the direction of policy rates. However, this concept has largely taken a backseat in recent ECB-speak in favour of recent data outturns.
- Our full ECB preview will be released next week.
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