ECB Insight: Lagarde at Pains to Leave September an Open Question

19 July 2024

By David Barwick – FRANKFURT (Econostream) – Having so aptly entitled our pre-ECB press conference analysis ‘No Signals, No Flags, No Guidance, No Promises’, our post-presser analysis might exude a certain satisfaction. It won’t. Instead, we see the need to very slightly modify a central prediction from Tuesday.

True, ECB President Christine Lagarde lived up to that title fully, and we cannot identify anything said by her on Thursday that can be reasonably interpreted as meant to encourage expectations of a September rate cut, even implicitly.

The most promising candidate will be seen by some as her comment that ‘between now and September, we will be receiving a lot of information’. It is not hard to draw a parallel between this comment and a superficially similar one in March, when she said, ‘We will know a little more in April, but we will know a lot more in June.’

We reject the comparison, however. The context of the comment in March was very clearly the issue of when the first rate cut would occur, with June already having been amply flagged as a possibility and Lagarde primarily interested at that moment in damping lingering expectations around April.

Yesterday, the question had been wordily framed as an attempt to discern whether more rate cuts were coming in general; there was no reference to timing, and in any case, Lagarde framed her answer as a response to the question of ‘what should we look at, to confirm or reinforce our confidence that we are on that disinflationary path and that it remains broadly on track and pointing in the right direction.’

Her full answer leaves us with the firm impression that all she wanted to convey was that the ECB would be in a better position in September to judge progress towards price stability, thanks to the plethora of data due between now and then. By no means was she seeking to hint that she expected the stars to align in September in such a way as to permit another cut.

Rather, Lagarde left the question of September very open. Indeed she could hardly have been more explicit on this score: ‘So the question of September and what we do in September is wide open and will be determined on the basis of all the data that we will be receiving.’

Going into the press conference, the baseline premise for most observers, including us, was that there would be a September rate cut, even if, as also anticipated by most ECB watchers and certainly by us, Lagarde would not be forthcoming with clear hints.

And even taking into account our own clearly expressed conviction that there would be ‘no signals, no flags’, we would have expected on Thursday to be able to read between the lines somewhere that the ECB is tilted slightly toward delivering a September cut.

We couldn’t.

We discount the second sentence of the monetary policy statement (‘incoming information broadly supports our previous assessment of the medium-term inflation outlook’). We expected this, and the full passage, along with the subsequent sections on inflation and the risks, make clear that the ECB is not relaxed about the outlook.

Neither do Lagarde’s comments on wage developments lend themselves to the image of an ECB brimming with confidence, but rather suggest a high degree of uncertainty (‘we don't have a lot of specificity at this juncture, and we will have a lot more of that in the coming weeks and months’).

We note also that Lagarde downright evaded the question of whether information since the projections were last updated had bolstered her confidence in the envisaged restoration of price stability.

And we find telling, perhaps even slightly pessimistic, her remark that ‘we are not at target and there's time to be had before we get to target’.

The point is that the press conference was, even for us, surprisingly barren of reason to think the ECB will cut in September.

Our thinking going into the press conference was that the ECB would cut in September as long as prospects for returning to price stability had not significantly deteriorated vis-à-vis June. We are sticking to this for now, but are marginally less confident that such a standard is sufficient for another easing move.

This small hawkish shift in our view is perhaps best accounted for by a remark by Lagarde made relatively late in the press conference that – more even than her characterisation of September as ‘wide open’ - captures the reason for our increased doubt:

‘So it's a story of “on the one hand, on the other hand”, which leads us to not make any decision on the occasion of this meeting and for future meetings it will be a matter of observing the data, analysing the data and determining whether or not we are reinforced in our confidence that we are on the path.’

The fact that the next eight weeks to 12 September will bring a great deal of information is no guarantee of any resolution to the ‘story of “on the one hand, on the other hand”’, let alone a happy one.

To be sure, policymakers are hoping for both, and may even get the reinforcement of their confidence that they wish for. We still suspect they will, but are slightly less convinced that they also think so.