During the post-meeting press conference on Thursday, ECB President Christine Lagarde delivered a moderately dovish message with maximum optionality. Rufaro Chiriseri, head of fixed income for the British Isles at RBC Wealth Management, writes

She reiterated that policy decisions are data-dependent, and was noncommittal on a September hike. This leads us to conclude that all options are on the table at the next meeting, and the result could be a pause or another increase. Market expectations for the terminal rate were muted, shifting down only slightly to 3.81% from 3.85%.

Lagarde’s repetition of the central bank’s focus on staff forecasts reinforced the ECB’s view that it should assess the impact of rate hikes on the economy before its next decision, which hints at the potential for a policy pause at some stage, in our view. According to the ECB, “inflation is still expected to remain too high for too long.” Therefore, we still see potential for another hike, but not necessarily at the September meeting. During the press conference, market reaction was more noticeable in the euro, which fell against the U.S. dollar to levels around $1.09. In the bond market, 2-year German Bunds recovered slightly from an initial knee-jerk rally of 10 basis points to settle around a yield of 3.02%.

While the ECB continues hiking, the near-term outlook for the eurozone economy has deteriorated. Firstly, economic activity indicators in June fell below consensus expectations and further into contractionary territory. Secondly, the results of the ECB’s Q2 bank lending survey signalled that both credit supply and credit demand continue to fall, with the demand for loans hitting record lows. Lastly, the May monthly data on credit published by the ECB indicates that the three-month average demand for credit from households and non-financial corporations moderated due to higher interest rates. This decline in credit is consistent with a meaningful drag on private-sector demand from tighter credit conditions, and ultimately, lower growth.

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