ECB Tightening Conviction Weakened Amid Higher Euro Area Inflation

Despite higher euro area inflation, MUFG Research is weakening its conviction around the pace of European Central Bank (ECB) tightening. The research firm had previously added 50bp of tightening to their call but now acknowledges that the call for an October hike looks shakier.

Market pricing has moved sharply lower this week, with less than 30% probability assigned to a back-to-back hike. This shift in market expectations follows ECB President Lagarde's dovish comments on Monday, where she indicated that rising long-term yields would 'slow growth and reduce pass-through [from energy to broader inflation] by more than projected in September.'

The reduction in front-month TTF pricing by over 10% has also reduced the urgency for policymakers to respond on a risk management basis. The European Commission survey for September showed a softer picture compared to last week's PMIs, with employment expectations and selling price expectations softening.