Will the ECB's premature pivot be adopted by the FED?

The European Central Bank raised interest rates by 75 basis points, in line with expectations. However, the very tone of the decision in combination with the communication during the conference was definitely dovish and suggested a possible pivot from the ECB.

Is it not a premature decision, however, given that inflation in Europe, and in Germany in particular, is not slowing down at all?

Interest rates up by 75 bp

The ECB raises interest rates sharply and the deposit rate is already 1,5%. This is the highest level since 2009, but it is worth noting that at the end of 2008 the rates were slightly above 3%. The market expected that the ECB would raise rates to this range, although taking into account the return from the ECB, expectations have significantly decreased and now point to only 2,7%.

In addition, the ECB did not announce that it would start reducing the balance sheet from December, but would only adjust the loan program TLTROto better reflect the current interest rate situation. Obviously this is still a very hawkish policy to what we have been used to for years, but on the other hand we are seeing a potential shift and an indication that rates may only increase basically once or additionally at the beginning of next year. This could be a premature exit from hawkish politics.

Inflation record

Data from Germany's largest region, North Rhine-Westphalia, showed inflation at 11% - a new long-term record. For the main reading, a slight increase from 10% to 10,1% is expected, but it is already known that it will be higher. Does the ECB see success in the fight against inflation prematurely then? But is he more concerned with the prospects of an economic slowdown?

The reading of full inflation in Germany at 14:00 CET on Friday, while in France we also have an increase to 6,2% from 5,6% against expectations of 5,8%. On the other hand, we are witnessing a massive inflation slowdown in Spain from 8,9% to 7,3%. However, the final picture is in favor of a further rise in inflation.

What does the Fed say?

The question is whether the current pivot on the part of the ECB and Bank of Canada it will also be adopted by the Fed, which will make its decision next Wednesday, November 2. While the market is hoping for it, the chances are slim given the strong economic recovery in the US and still high inflationary pressures. The final answer should come from today's PCE inflation data, although in this case core inflation is expected to continue to rise.

The zloty has recently benefited from the wave of improvement in the global situation. Yields dropped from above 9% to below 8%, which shows that the only thing we can count on is volatility. Shortly after the start of trading in Europe, we pay PLN 4,7562 for the dollar, PLN 4,7306 for the euro, PLN 5,4780 for the pound, and PLN 4,7811 for the franc.

Source: Michał Stajniak, XTB