ECB preview: a hawkish pause will satisfy hawks and doves ECB preview: a hawkish pause will satisfy hawks and doves ECB preview: a hawkish pause will satisfy hawks and doves

ECB preview: a hawkish pause will satisfy hawks and doves

Bonds 3 minutes to read
Althea Spinozzi

Head of Fixed Income Strategy

Summary:  At this week's ECB rate decision, policymakers will likely opt for a pause. Despite the hawks arguing that another hike is warranted, a recession is underway in their own countries. The doves will maintain that we are finally seeing rate hikes feeding through the economy and that overtightening risk is rising. Yet, for the ECB to keep its hawkish bias, policymakers might need to turn to the Pandemic Emergency Purchase Program (PEPP) and stop reinvestments. The PEPP program is half the size of the APP, and redemptions currently account for only 0.02% of its total holdings. Stopping reinvestments under the PEPP program will send a hawkish message without moving the needle much.

Economic data are screaming out loud stagflation for the Eurozone. The European Commission has cut the eurozone GDP for this year to 0.8% (prev. 1.1%) and 1.3% (prev. 1.6%) for 2024. Yet, inflation is poised to stay at 5.6% this year, while in 2024, it will drop to 2.9%, slightly higher than previously forecasted. In the meantime, confidence indicators are falling.

This week’s ECB monetary policy meeting will see the doves and the hawks fighting. Yet, it will come down to whether policymakers decide to tolerate negative growth surprises in Germany and the Netherlands. Indeed, the loudest hawks come from these countries, and the question is whether they will continue to support rate hikes while their economies are tumbling.

With the Federal Reserve having already delivered a successful hawkish pause, it might have arrived the time for the ECB to do the same. The biggest challenge will be for Lagarde to deliver a pause without sounding dovish. To do that, the central bank might need to look at its balance sheet and stop reinvestments under the Pandemic Emergency Purchase Program (PEPP).

Interest rate hikes are working

So far, the central bank has hiked by 425 basis points, bringing its deposit rate to 3.75%, just below market expectations of a 3.90% terminal rate. At this point, the ECB can claim that it has already done a lot and that rate hikes are slowly feeding through the economy, warranting a pause before deciding on another rate hike.

PEPP: an opportunity for hawks and doves

The Pandemic Emergency Purchase Program (PEPP) represents an opportunity for hawks and doves. The PEPP program is half the size of the APP, and redemptions currently account for only 0.02% of the PEPP total holdings. Stopping reinvestments under the PEPP program will send a hawkish message without moving the needle.

While under the quantitative tightening program (QT), the ECB stopped reinvestments under the asset purchase program (APP), reinvestments under the PEPP continued. The average weighted maturity of bonds under the 1.6 trillion PEPP program is above seven years. Therefore, the current volume of redemptions is minimal, with the latest quarter-end redemptions amounting only to 3 billion (roughly 0.2% of the total holdings under the PEPP). Although stopping reinvestments under the PEPP might not add pressure to rates in the short term, it will help the ECB to deliver a hawkish message amid a dovish decision. Tweaking further disinvestments under the 3.135 trillion APP program instead might cause volatility in bond markets.

Source: Bloomberg.

Quarterly Outlook 2024 Q3

Sandcastle economics

01 / 05

  • Macro: Sandcastle economics

    Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.

    Read article
  • Bonds: What to do until inflation stabilises

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain inflation and evolving monetary policies.

    Read article
  • Equities: Are we blowing bubbles again

    Explore key trends and opportunities in European equities and electrification theme as market dynamics echo 2021's rally.

    Read article
  • FX: Risk-on currencies to surge against havens

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperform in Q3 2024.

    Read article
  • Commodities: Energy and grains in focus as metals pause

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities in Q3 2024.

    Read article

Saxo Capital Markets (Australia) Limited prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments.Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Please read our disclaimers:
- Full Disclaimer (
- Analysis Disclaimer (
- Notification on Non-Independent Investment Research (

Saxo Capital Markets (Australia) Limited
Suite 1, Level 14, 9 Castlereagh St
Sydney NSW 2000

Contact Saxo

Select region


The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit

Saxo Capital Markets (Australia) Limited ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide, Product Disclosure Statement and Target Market Determination to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation. The Target Market Determination should assist you in determining whether any of the products or services we offer are likely to be consistent with your objectives, financial situation and needs.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.

Please click here to view our full disclaimer.