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Staff See Lower Rate Peak Than Market – Reuters Sources

ECB
  • Very limited reaction in Euro rate futures on the back of the below but worth flagging. EURUSD touches session highs of 0.9783 having already retraced the post-US CPI decline to an intraday low of 0.9633, with the move coinciding with S&P e-minis spiking and DXY sliding.
  • Reuters reports that “ECB staff see the need for fewer rate hikes than markets now estimate to tame inflation, according to a new internal model that could serve as a key input in future deliberations, four sources close to the discussion said.”
  • “The new model, called Target-Consistent Terminal Rate, showed the ECB needed to raise its deposit rate to 2.25% - or even less than that if at the same time it shrinks its balance sheet - to bring inflation back to its 2% goal.”
  • That contrasts with ECB-dated OIS currently showing rates touch just over 3% in Jul/Sep 2023.
  • However, “policymakers at the gathering gave the model a mixed reception, with many criticising some of its basic assumptions after staff failed to predict the current surge in inflation, the sources said.”
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