Exclusive: ECB Insider: Even a Negative May HICP Surprise Might Not Derail a June Rate Cut

14 May 2024

By David Barwick – FRANKFURT (Econostream) – Even a very poor spot euro area inflation reading this month would not necessarily dissuade the European Central Bank’s Governing Council from going through with the 25bp rate cut that has been amply signalled for its June meeting, in the view of a Eurosystem insider who spoke to Econostream recently.

Technically, a bad surprise in the flash HICP number for May to be released on the last day of the month, less than a week before policymakers gather, could potentially interfere with the start of monetary easing, but even beyond the question of magnitude, all negative surprises were not equal, this person said.

‘We are data-dependent to the degree that the data affect how we see the medium term’, he said. Even if large and in the wrong direction, a discrepancy between the May flash estimate and what the ECB had expected for May was ‘not relevant for us if it doesn’t have an impact on medium-term inflation.’

The highest relevance for policymaking was assured any development exerting a significant impact on mid-term prospects, which was therefore the main scenario that could deter the Council from cutting rates as currently envisioned, he said.

In contrast, anything that could be explained away as one-off in nature would be looked through by authorities independent of magnitude, he said.

The ECB’s forecast horizon currently extends out to 2026, he reminded, and incoming data had to be seen from that perspective.

Theoretically, a small surprise in the spot inflation data could have weightier implications for the medium term than a large one, depending on the underlying reasons, he said. In either case, the question would always be one of the medium term, he insisted.

That this sometimes got lost in the shuffle among ECB watchers was due to policymakers’ tendency to repeatedly gloss over the point, he said.