ECB Insight: Governing Council at Last Goes Well and Truly Data-Dependent, Albeit for Lack of Alternatives
16 March 2023
By David Barwick – FRANKFURT (Econostream) – The European Central Bank stuck to its guns on Thursday, with President Christine Lagarde’s relatively surefooted handling of the press conference after the Governing Council meeting characterised by a calm insistence on data-dependence and watchfulness in the context of a job likely not yet done.
As such, we see our pre-meeting assessment from Wednesday very much borne out, not least in view of the decision in favour of a 50bp hike rather than alternatives that suddenly appealed to some observers. We would highlight two key paragraphs of our assessment, the first being our prediction of what we called a ‘the-less-said-the-better’ outcome that, we said, ‘corresponds to the uncertainty of the current environment, leaves coming decisions up to coming developments and skirts needless confrontation.’
That is what the ECB delivered, and when asked right off the bat about the future pace of hikes, Lagarde merely redirected the questioner to the opening of the Council’s decision, saying that this was ‘really the best guidance that we can provide’.
Going forward, she continued to read from that statement, the rate path would depend on the inflation outlook based on economic and financial data, underlying inflation and how well monetary policy was being transmitted.
The other key paragraph of Econostream’s pre-meeting analysis followed the first. ‘All this is not to say that Lagarde is going to appear to be without bias’, we wrote. ‘The direction of travel should remain up, and despite the recent public disharmony, there remains a high degree of consensus on the need to tighten further. We don’t see Lagarde trying to gloss over this to satisfy an increasingly vocal but still small minority ready to call it quits, unless the entire SVB fallout becomes so acute by Thursday that all bets are off.’
The SVB fallout not having become so acute in the interim, Lagarde didn’t gloss over the need to hike some more. ‘If our baseline was to persist, when the uncertainty reduces, we know that we have a lot more ground to cover, okay?’, she said.
The ECB was ‘not waning on our commitment to fight inflation, and we are determined to return inflation back to 2% target in the medium term’, she insisted. ‘That should not be doubted. … And we will take the measures that will be necessary.’
Still, she acknowledged, the persistence of the baseline was a ‘big caveat’. In particular, she noted, the revised staff macroeconomic forecasts had relied on inputs provided as of a cut-off date that preceded March 1, since when ‘a lot obviously has developed’.
‘So there is a level of uncertainty that has been completely elevated as a result of that, and that is why we reinforced the principle of data dependency’, she added. In consequence, ‘it is not possible to determine at this point in time, you know, what the path will be going forward.’
As for what we at Econostream yesterday called ‘an increasingly vocal but still small minority ready to call it quits’, Lagarde revealed that this faction consisted of ‘three or four’ members of the Council who had not supported today’s decision, though ‘not in its principle, because they were ready to go for that decision, but [because] they were keen to probably give a bit more time to see how the situation unfolds and what additional information we can collect.’
The Council had signed on more or less in its entirety to a March hike long before Silicon Valley Bank went belly up (a circumstance that, in line with our prediction on Wednesday, clearly did not ‘overturn previous thinking at the ECB’), so that recently growing expressions of reluctance concerned the post-March policy outlook more than today’s decision.
That despite all the market turbulence in the run-up and even during the Council meeting less than a handful of policymakers got cold feet, and apparently not even to the principle of the proposed 50bp hike, suggests to us that the ECB won’t have too much trouble increasing interest rates at least a bit further, assuming the data play along.