ECB Insight: A Dovish De Guindos Identifies the ‘Key Question’ for a September Rate Cut

23 July 2024

By David Barwick – FRANKFURT (Econostream) – With one sentence, European Central Bank Vice President Luis de Guindos on Tuesday seems to have established what information September has to bring for the Governing Council to cut interest rates again. Less explicitly, but to our mind nonetheless unambiguously, he conveyed the expectation that the conditions for more easing would be met eight weeks from now.

 

In identifying the pivotal issue for a September cut, he achieved a level of clarity that President Lagarde never approached as she alternately fielded and (verbosely) evaded questions following last Thursday’s decision by the Council to leave rates unchanged.

 

De Guindos was asked in an interview with Spanish news agency Europa Press whether the ECB’s need to gain increased confidence meant that in the meanwhile it lacked confidence.

 

‘The current level of uncertainty is huge, so we have to be prudent when taking decisions’, de Guindos began, effectively casting his answer in terms of the question whether to cut or to leave rates unchanged.

 

‘When we say that we want to have more confidence, we mean more confidence that at the end of 2025 inflation will be at our definition of price stability, which is an inflation rate of 2% over the medium term’, he then continued. ‘That’s the key question.’

 

Of course it was always clear that the process of easing was linked to the quarterly updates of the forecasts, which is why we wrote on 16 July that we thought the ECB would cut in September, ‘provided there is no substantial worsening of the inflation outlook versus the current macroeconomic projections.’

 

But Lagarde left shrouded in murkiness the precise importance of the projections.

 

True, at one point last Thursday she said policymakers would ‘still continue to apply our threefold approach, which will focus on [the] inflation outlook.’ Only to add immediately, however, that it would ‘also look at underlying inflation, into all its decomposition, and we will look at the transmission.’

 

‘We will continue to review those three components in the same way’, she added, effectively bestowing equal rank on the projections, underlying inflation and policy transmission.

 

All that, it is worth noting, was in answer to the question of whether she was more or less confident than six weeks previously about when 2% inflation would be achieved, a question she essentially, albeit ramblingly, evaded.

 

It did not help that Lagarde at another point during the press conference again seemed to want to say that the macroeconomic projections would be doing the heavy lifting in September, only to then remember some obligation to wax egalitarian about the value of every little data point’s contribution to the decision.

 

De Guindos cut through all that, underscoring the singular role of the projection exercise: ‘[W]e will have more information in September, and especially new macroeconomic projections, so we will be able to better reassess the monetary policy stance.’

 

Directly following that, he identified the ‘key question’ as being whether price stability was still seen returning in 2025, and lest anyone still not have gotten the idea, he promptly followed that up with yet another clear message of the same nature.

 

‘But most of all, we will have new macroeconomic projections in September, and it will be crucial to see in those projections that inflation is steadily converging towards 2% over the medium term’, he said.

 

As if driven by the need to make clear what his boss had stubbornly refused to, de Guindos doubled down yet again in his very next response, dismissing wage data as subject to a lag and adding, ‘In September we will have another two months of data on inflation and underlying inflation, but the new macroeconomic projections will be the most important.’

 

There is one more comment de Guindos made in the interview to which we would draw attention, namely: ‘Data-wise, September is a much more convenient month for taking decisions than July was.’

 

Lagarde had appeared on Thursday to be saying something vaguely of the sort, evoking the memory of a comment by her in March (‘We will know a little more in April, but we will know a lot more in June.’) that had been clearly intended to steer expectations.

 

The resemblance however was superficial, as we explained last Friday. In contrast, in the case of de Guindos, we find the comment substantially more pregnant with meaning, given the greater substance of the statement per se; the context of the answer it effectively summed up; and the question to which it responded.

 

Zooming out, we find the overall tone of the interview quite dovish:

 

  • Inflation data are ‘practically in line with our projections’
  • ‘some worsening in the data for economic growth’
  • ‘all measures of underlying inflation are coming down, therefore the disinflation process will continue from the start of next year’
  • ‘We are already seeing that wages are starting to slow down’
  • ‘And if wage increases moderate, services inflation … will moderate too, and that will enable us to reach our 2% inflation target at the end of next year’

 

We are tempted to believe that de Guindos might even have been persuaded to support a rate cut last week, and only out of an abundance of caution agreed to wait until September, when however he evidently expects the data – first and foremost the updated projections – to support another reduction in borrowing costs.