ECB Insight: Lagarde Transitions to Data-Dependent ‘Open Mind’, Introduces Possibility of Pause

27 July 2023

By David Barwick – FRANKFURT (Econostream) – European Central Bank President Christine Lagarde on Thursday left the evolution of monetary policy in the coming months entirely up to incoming data, except to make clear that a cut was not one of the options that stood a chance of being considered.

Speaking at a shorter-than-usual, not particularly edifying press conference following the meeting of the Governing Council, Lagarde took the initiative to explain the rewrite of the sentence from the monetary policy decision that had previously vowed that ‘the key ECB interest rates will be brought to levels sufficiently restrictive’, but as of today is promising that ‘the key ECB interest rates will be set at sufficiently restrictive levels’.

This change was ‘not just random or irrelevant’, she said, but rather, it was ‘predicated on our determination to be data-dependent.’

‘So, we are deliberately data-dependent, and we have an open mind as to what the decisions will be in September and in subsequent meetings, because this determination based on data might vary … from one month to the other’, she said. ‘So, we might hike, and we might hold, and what is decided in September is not definitive. It may vary from one meeting to the other.’

Lagarde bristled unnecessarily at the innocent, though superfluous question of a reporter as to whether she would be willing to repeat her assertion from six weeks ago that ‘we are not thinking about pausing’, rebuking him as though she had been asked to parrot her previous words for someone’s amusement.

‘What I can assure you of is that we're not going to cut; that is a definite no’, emerged from her tirade. ‘But on the other side, could be a hike, could be a pause. And if it is a pause, it would not necessarily be for an extended period of time…’.

Today’s decision had been unanimous, she said. How much ground the ECB still needed to cover, if any, would depend on the data, she said, citing the September staff projections, inflation readings to emerge in the interim, and an update on how well policy is being transmitted.

Lagarde confirmed the materialisation of policy transmission, even ‘strongly’, with ‘more in the pipeline’, with respect not merely to financing conditions, but also to the real economy.

At Econostream, we have no problem standing by what we said on Tuesday, namely that ‘the ECB is very uncertain as to whether it is going to hike in September’. Lagarde’s performance today could hardly have made clearer that the Council has started the inevitable process of feeling its way forward, quite unsure as to the outcome of the 14 September monetary policy meeting, let alone any thereafter.

We added to that assessment that ‘we suspect it won’t’, i.e. won’t hike in September. It is clear that at this early juncture, even before any of the other Council members has had a chance to weigh in, anonymously or otherwise, there remains a non-negligible risk that the ECB will in fact hike. It is however also clear that the stage has been set for a pause, which for us at this point, as before today's press conference, is the likelier scenario.