ECB Insight: Nagel Tempers His Language, If Not Necessarily His Views

11 July 2023

By David Barwick – FRANKFURT (Econostream) – Is the European Central Bank Governing Council’s most prominent hawk going dovish?

An examination of nearly a month’s worth of comments from Bundesbank President Joachim Nagel – facilitated by his recent tendency to intervene almost daily - at least opens the door to the possibility that his near-term monetary policy views have evolved in a less categorical direction, as he appears substantially more committed to a decision based on the data available when the time comes.

Not unlike other central bankers, Nagel relies often on vague wording or on pronouncements that could be equally well uttered at virtually any point during the cycle when inaction is not the only obvious course of action, so to speak.

For example, the day after the 15 June monetary policy meeting, Nagel, who heads the German Bundesbank, said that policymakers were ‘still far from giving the all-clear signal’ and called for ‘decisive monetary policy action’, leaving any degree of precision to observers’ imagination.

Separately but on the same day, he said that the ECB still had ‘a long way to go’ and ‘more ground to cover’, and would ‘continue in its efforts’.

We would concur that a policy hawk would be more likely to use this language, especially words like ‘decisive’ and ‘long’. And yet, if one considers the ground still to be covered to include the period during which rates remain at their peak, and if one also takes into account the July hike flagged by a wide range of Council members, then even a dove should not find too much to quibble about in any of this.

However, Nagel has gone further than relatively hazy utterances, saying also on June 16 that the ECB ‘may need to keep raising rates after the summer break’, which can reasonably be interpreted as (at a minimum) a rate hike in September.

But as many times since then that he has expressed himself specifically on monetary policy – at least nine by our count – Nagel appears reluctant to go back out on this particular limb.

He came closest on 3 July, when he said that possible post-July tightening would ‘be decided depending on future data developments’, adding, ‘The way I see it, we still have a way to go.’

The juxtaposition of the two remarks hardly excludes that, with more than ten weeks to go, he was signalling anew an ongoing predisposition to raise rates yet again after the highly likely hike at the end of this month, though the phrasing was certainly less exigent than in June.

Invited in an interview on 4 July to clarify his stand with regard to monetary policy beyond the 27 July Governing Council meeting, he only demurred, insisting that it was ‘not worth speculating’ given the ‘very, shall I say, volatile environment, with difficult market conditions.’

‘The direction is right so far, and we'll see what else might have to be done after the summer break, but we'll see when we have the data’, he said.

He has since then uniformly refused to be drawn out about future moves, saying on 5 July that such a question ‘cannot be answered at the present time’, given high uncertainty. ‘Against the background of this uncertainty, we are currently refraining from giving an exact "interest rate outlook" or forward guidance in our monetary policy communication’, he said.

And in an interview published on Monday, he went no further than to note ‘the prospect of another interest rate hike in July’ and to claim that the volatile operating environment forced the ECB to engage in what he called ‘driving on sight.’

‘The so-called forward guidance as an instrument - i.e. giving guidance to the markets with our own longer-term interest rate expectations - does not suit a phase in which there are so many uncertainties, he said. ‘In this situation, we should not commit ourselves too far in advance.’

Has Nagel become more dovish in his own policy preferences? Certainly not at a fundamental level. At the most, he is acknowledging the implications of the downward trend of inflation, a trend he has willingly recognised, though he has tended to note the uncertainty these developments are subject to and said on 21 June in this context that it would be a ‘first order error to give up too early’ policy-wise.

Still, he must have noticed that his 16 June suggestion that monetary tightening would still be appropriate a full three months hence has not generated much of an echo, at least not publicly, among his peers.

The latter seem willing to accept the logic that statements about the future are not merely speculative under high uncertainty – precisely the argument Nagel is now availing himself of – but even out of place under the data-dependent, meeting-by-meeting approach that the ECB is now, finally, really and truly supposed to be following.

Whilst this would be a good reason for Nagel to reign in his public enthusiasm for a September hike, we also don’t rule out a bit of genuine, growing uncertainty on his part as to whether the amply flagged July move will put the ECB in a position to at least wait and see whether further tightening will be needed.