Peter Goves (MFS Investment Management) | As widely expected, the ECB kept all three of its policy rates on hold at the neutral July meeting. The deposit rate therefore remains at 3.75% following the cut at the June meeting. The central bank still considers prevailing rates are contributing to lowering inflation and that monetary policy is keeping financing conditions restrictive. Future decisions will still ensure that the policy rates remain “sufficiently restrictive for as long as necessary”. Naturally, the ECB will not commit to a particular rate cutting path and will continue to be guided by data. Overall, this was a fairly neutral, non-committal press conference.
Our base case is for a cut in September. In this sense, we don’t necessarily believe September is “wide open”. Indeed, a cut is around 80% priced for September. We believe upcoming data should affirm the disinflationary narrative and enable a cut at the next meeting. Together with rising chances of the Fed cutting (global drivers dragging yields lower), we see Bund yields falling over H2 with a year end target of 2.25%. This keeps us constructive on core euro area duration.
EGB spreads (ex France) remain relatively resilient, with 10yr BTP-Bunds back at tight levels. QT policy has been communicated transparently with predictable implementation. Supply continues to be absorbed well too and pressures are waning over the summer months. We continue to see potential volatility localised in OAT-Bund spreads, which continue to remain vulnerable to France’s budgetary and government formation processes.
