Exclusive: ECB Insiders: July Rate Hike Increasingly Seen as Not Enough

26 June 2023

Exclusive: ECB Insiders: July Rate Hike Increasingly Seen as Not Enough
- ECB Insiders: Two of Three Surveyed Inclined to Hike Anew in September
- ECB Insiders Reject Market Expectations of Initial Easing Move in 1H 2024
- ECB Insiders Want to Leave Interest Rates at Terminal Level for Some Time
- ECB Insiders: July Rate Hike More or Less a Given

By David Barwick – FRANKFURT (Econostream) – The September monetary policy meeting of the European Central Bank Governing Council apparently stands a decent chance of bringing yet another rate hike, based on recent conversations of Econostream with several Eurosystem insiders, but there is even greater agreement that financial markets take an unreasonably optimistic view of when the next rate cut will come.

Of three policymakers with whom Econostream spoke about the prospects for more monetary tightening, none of whom has taken a public stand on September, all considered the 25bp hike flagged by ECB President Christine Lagarde for 27 July to be virtually a given, provided that ‘the baseline holds and nothing new happens’, as one person put it.

Two of the three policymakers made clear both that they expected developments over the course of July and August to be consistent with another such move at the 14 September Council meeting, and that, accordingly, they would support this.

The third person was somewhat less inclined to specify his own inclination at the September meeting, but more out of an abundance of caution than out of any genuine confidence that the hiking cycle could end no later than next month.

‘We still know that core and headline inflation are way too high, and we need to see how things will evolve’, person three said. Much of the impact of previous tightening had yet to be felt, he said.

‘It was therefore appropriate to slow the pace of tightening, but we really don’t know where the peak rate is’, he said. ‘And we shouldn’t kid ourselves that we really know when core inflation will let us get there, because we don’t.’

Person two and person three were both explicitly supportive of a continuation of monetary tightening beyond July, drawing attention to upside risks, with person three preoccupied with wages and person two casting doubt on the durability of lower food price pressures, given unfavourable weather conditions for crops in many places.

‘Under the current circumstances, which can always change, I don’t see that a 25bp hike in July is going to do the job’, person two said. ‘Based on our own forecasts, we’re looking at more than two years of above-target inflation from today, leaving aside all the time we’ve already been way over 2%. I just don’t see us moving once more and then being able to think that everything we’ve done so far just has to feed through the economy, while at the same time we say that upside inflation risks dominate.’

That the next easing move by the ECB would come in the first half of 2024 was roundly rejected by all three people, who seemed to regard the expectation as a quirk of the markets and likely explained by undue pessimism about the economy, a pessimism they felt was amply belied by labour market strength.

Person one marvelled at the ‘pretty quick cut’ embedded in expectations. That a loosening of monetary policy would occur so soon was ‘not necessarily the case’, he said diplomatically, especially in the context of the necessity of keeping expectations anchored, lest the ECB ‘need to do much more’ tightening.

Person two commented that he found the expectation ‘unrealistic’ and ‘wishful thinking’, and, like person three, expressed support for leaving interest rates at the terminal rate for a sustained period so as to be certain of the durable restoration of price stability.