ECB Insight: Once Again, the Governing Council Has an Intention

2 February 2023

By David Barwick – FRANKFURT (Econostream) – Not for the first time at the European Central Bank, monetary policy has come down to a matter of how much an intention is worth, but with the significant difference that on this occasion, President Christine Lagarde made an earnest effort to address this question, even if the attempt raised yet more questions.

Following the meeting of the Governing Council, which fully lived up to the prediction we made Tuesday that monetary authorities would be ‘still inclined to hike significantly at a steady pace’, Lagarde read the statement accompanying the decision, saying that ‘[i]n view of the underlying inflation pressures, the Governing Council intends to raise interest rates by another 50bp at its next monetary policy meeting in March and it will then evaluate the subsequent path of its monetary policy.’

At Econostream, we had to think immediately of the Council’s monetary policy meeting last June, after which Lagarde announced that ‘the Governing Council intends to raise the key ECB interest rates by 25bp at its July monetary policy meeting.’

We reported in June that the ECB’s reliance on ‘intention’ did not sit well with all Council members. ‘If you don’t define certain words, then you are left with different understandings of terms’, one member said to Econostream at the time. ‘There’s a very high probability it’s going to be 25bp. So, do we have optionality when we say “intend”? What are those things that might change our intention? There is no answer. We didn’t have time to dive into this.’

In fact, as is well known, the ECB went on at the July meeting to deviate from its intention and hike by 50bp rather than 25.

Today, Lagarde addressed doubts head-on, and though she may have contributed to the number of question marks around a 50bp hike next month, she at least made it clear in the process that there was indeed reason to wonder.

After all, as she clarified, the ECB’s latest intention is conditional enough to be consistent with the Council’s continued strong attachment to a data-driven, meeting-by-meeting approach. So, pretty conditional, especially given the current environment of extreme uncertainty.

‘I would just remind you that our decision is not the decision for March’, she was quick to correct a questioner at the press conference who referred to ‘today’s decision to raise interest rates by 50bp in March.’

Intend ‘is a strong word’, Lagarde elaborated. ‘It’s not an absolute, irrevocable, unconditional commitment, but it’s a strong word. We intend to raise by 50bp.’

Lagarde also corrected herself a few seconds later, when she was describing the ‘very, very large consensus’ at today’s meeting and inadvertently ascribed too much certainty to the March outcome. The dominant sentiment today was ‘that it should be 50 this time around, it should be fi-, it is intended to be 50 in March’, she said, emphasising ‘intended’.

‘What we are saying is that as we will receive projections, we will need to assess what rates, what level, at what pace it will be needed…’, she said, thus cementing the impression that the final decision will come down to this important piece of information missing today.

We recall yet again that a Council member told Econostream on December 15 that ‘in March, I won’t be surprised when somebody starts asking, “Why 50?”’ especially if the staff projections remain unchanged or show any improvement in the inflation outlook.

A 50bp hike next month made sense to most Council members in the context of the current outlook with respect to core inflation, Lagarde said today. Communication was an issue for some, she admitted, which is not hard to imagine.

‘We have all scenarios available to decide that March actually warrants a 50bp increase, and this is what we are saying when we say, “we intend to”, which is why the word is pretty strong’, Lagarde said.

For us at Econostream, nothing has changed much. We already expressed mild reservations concerning the inevitability of a 50bp hike in March. Indeed, we have done so since the Council’s December policy meeting, and we see little need to revise this view, except perhaps to note that Lagarde’s clear corroboration today of those reservations makes us even more comfortable with them.

And to be quite clear again: as before, this doesn’t mean that we don’t – at this point – continue to expect a 50bp hike in March, rather than fine-tuning, i.e. 25bp, which we are more inclined to see as the outcome of the May meeting.

In essence, we can repeat what we wrote Tuesday about today’s meeting, namely that ‘relying on December’s communication once more in February - at most with a slightly clearer reminder of the ECB’s data-dependent, meeting-by-meeting approach - is perfectly consistent with our baseline, but also no impediment to an outcome we are less willing to rule out, namely a start of the fine-tuning part of the hiking cycle a little earlier than markets currently anticipate.’