ECB Insight: Council Members Speak Their Minds, but the Policy Outlook Remains Unchanged

16 September 2024

By David Barwick – FRANKFURT (Econostream) – Ten or so members of the European Central Bank’s Governing Council have already piped up since ECB President Christine Lagarde’s press conference on Thursday; their comments do not, to our mind, change the outlook or contradict Lagarde.

For us, the hierarchy of ‘interestingness’ starts with Lagarde’s own comments on Friday reinforcing the perception of the previous day that December was the likelier date of the next rate cut.

‘We have a lot of data at projections exercises, we also receive data in between’, she said during the Eurogroup meetings in Budapest. ‘And we look at everything. And if there is a significant change relative to our baseline, we will reassess.’

The first part of that is indisputably reminiscent of – albeit a touch weaker than - her comment at the March press conference that the ECB would have more data in April, but a lot more in June – her way at the time of flagging the latter as the more probable date of the first cut.

In the context of a similar signal from her on Thursday, we assume that this indeed is how she wanted to be understood.

Meanwhile, Latvijas Banka Governor Mārtiņš Kazāks on Friday suggested that an October rate cut, which we are relatively certain he would be among those less likely to support, could come up for consideration ‘[i]f there’s an unexpected hit to the economy, and if the economy feels significantly weaker than is currently expected and inflation also significantly declines’.

On the face of it, the inclusion of inflation is odd. Final August HICP will come this Wednesday and, as usual, probably be devoid of any huge surprises. The flash estimate for September will be published on 1 October, but here, too, policymakers seem to know what to expect, Lagarde herself having said on Thursday that ‘September will certainly deliver a low reading of inflation.’

With inflation thus already expected to decline ahead of the October meeting ‘significantly’, to use Kazāks’ term, and to rebound thereafter, such a condition for consideration of an October rate cut seems meaningless.

Unexpected economic weakness makes more sense, but the preliminary flash estimate of 3Q GDP isn’t due until 30 October, nearly two weeks after the Governing Council meeting, meaning the ECB won’t have much more information in this respect than it has now.

Barring an obvious negative shock in the form of some event, then we doubt that Kazāks expects somewhat sparse incoming data like August unemployment (released on 2 October) or August industrial production (15 October) to motivate a rate move to which markets currently attach a probability that, as he noted, ‘isn’t big’.

Kazāks was speaking for the consumption of the general public without the luxury of fine-tuning his initial wording before publication, so we won’t hold him to a high standard of precision.

In general, we see no new or important signal here, though it is worth keeping in mind that at a later date (which we don’t expect to be October), pronounced economic weakness could indeed motivate the ECB to accelerate its easing.

His Baltic neighbour, Eesti Pank Governor Madid Müller, as well as National Bank of Belgium Governor Pierre Wunsch, both observed the weakness of growth but said nothing encouraging the idea of an October move, warning instead about services inflation.

It was ‘quite likely’ that inflation would soon reaccelerate due to base effects, while services inflation at more than 4% ‘is a cause for concern in the outlook’, Müller said on Friday in a blog post.

Wunsch in a television interview on Sunday went a bit further, identifying ‘a small risk that [further policy easing] will happen more slowly if services inflation remains elevated.’

Bank of Lithuania Chairman Gediminas Šimkus appeared to note the connection between the state of the economy and the pace of easing, saying on Friday that ‘[r]ates will continue declining, but the speed of cuts will depend on data.’

However, he called for ‘strategic patience’, which is clearly not suggestive of another rate cut as soon as October.

In any case, Šimkus’ scepticism about an October move was amply documented in an Econostream interview earlier this month. At the time, he expected the forecasts to be little changed and the ECB to remain on track to restore price stability at the end of 2025. This being consistent with how things turned out on Thursday, we see no reason for him to have reversed his position regarding October.

And then there is Banque de France Governor François Villeroy de Galhau, who, despite having shifted dovishly as of some time ago, did not say anything readily construed as agitating for October.

‘[T]he direction of the journey is clear - we should continue to reduce gradually and as appropriate the degree of restriction of our monetary policy’, he said in a speech in Budapest on Friday. ‘But the pace has to be highly pragmatic: we are not pre-committing to any particular rate path, and we keep our full optionality for our next meetings.’

We regard that as a fairly neutral characterisation of the present policy outlook and suspect that literally no one on the Governing Council would quibble with any of it, even amid obvious differences in views as to how best deploy that optionality.

All in all, we see no change since 12 September in the policy outlook and no obvious rifts opening up. We continue to think – as we already did prior to last Thursday – that the next rate cut will come in December.

To be clear, we by no means completely rule out an alternative scenario.

However, with no updated projections until December, with the baseline scenario doubtless widely assumed to remain valid, and with relatively little new information in the mere 35 days between the Council meetings of September and October, we maintain the opinion that it would take a quite significant development to make October likely.

Still, we must note, it will be interesting to hear from the more dovish members of the Governing Council, who seem to have let their mostly more hawkish colleagues move first.