Euro: Second hike seen as energy clouds outlook – Societe Generale

Societe Generale's Kenneth Broux anticipates a second 25 basis points ECB deposit rate hike, emphasizing the significance of wage dynamics and updated staff forecasts in determining the extent of tightening. The bank highlights rising oil and natural gas prices, warns of stagflation risks if energy and food shocks continue, and suggests a higher inflation plateau may necessitate a more elevated terminal rate than currently projected.

While today's ECB decision to raise the deposit rate by another 25 basis points appears inevitable, the impact hinges on wage developments. President Lagarde's perspective on the outlook, staff forecast revisions due to higher energy prices, and optimism regarding growth prospects will be crucial factors. Although the current energy shock is expected to have a limited effect on wage growth, prolonged higher energy and food prices could lead to stagflationary consequences further down the line.

The ECB previously projected headline inflation to reach 3.4% in Q3 and remain elevated until early 2027, but a higher plateau may require a higher terminal rate to bring inflation back to target by 2028. Economists anticipate a further two increases in the deposit rate after today. The forward curve currently prices in a peak of just over 3% for the deposit rate (2y2y), indicating an additional two hikes.

Our economists estimate a 25 basis point increase to 2.75% in December. The 10-year German Bund yield, closely tracking natural gas since July, may be overvalued relative to inflation expectations. For EUR/USD, the heavy concentration of option expiries could help keep the currency close to the 200-day moving average.