Synopsis:

ING sees potential for hawkish repricing at the ECB meeting on Thursday. While a 25bp rate cut is fully priced in, markets are keen to understand future rate paths. ING suggests that if the ECB emphasizes its dependence on forecasts and downplays the likelihood of an October cut, it could lead to a more hawkish stance.

Key Points:

• Current Market Pricing:

  • A 25bp cut is fully anticipated by the market.
  • October has a 40% chance of an additional 25bp cut priced in, and December cuts are more than fully priced in.

• Potential for Hawkish Repricing:

  • ING anticipates that the ECB might emphasize forecasts, potentially limiting the scope for rapid rate cuts and confining rate changes to quarterly steps for now.
  • Such communication could lead to a hawkish shift, flattening the EUR curve and altering front-end rates.

• Market Outlook vs. ING Forecast:

  • Markets expect the deposit facility rate to reach 2% to 2.25% by mid-next year, which is ahead of ING’s forecast for more accelerated cuts starting in early 2025.
  • The market’s aggressive pricing reflects not just eurozone conditions but also influences from US rate expectations.

Conclusion:

ING believes there is room for hawkish repricing if the ECB stresses its reliance on forecasts and limits immediate future rate cuts. This could impact front-end rates and the EUR curve, aligning market expectations with a more measured easing approach.