ECB Insight: With or Without This Week’s Better Data, 50BP in December Would Be Questionable

31 October 2024

By David Barwick – FRANKFURT (Econostream) – First and foremost, we still stand by the article published here on 18 October, the main point of which was to argue that markets were ‘seeing the European Central Bank Governing Council’s decision on Thursday a tad too strongly through the prism of wishful thinking.’

Having had numerous conversations with Governing Council members starting earlier that day – hence the appearance of the aforementioned piece a few hours later – and of course continuing all last week in Washington, we continue to see a 50bp cut as unlikely.

To be sure, new data make that option even less likely. Indeed, significantly less, though with another six weeks still to go before the December Governing Council meeting, nothing should be ruled out.

However, our perception of a 50bp cut as unlikely depends less on the growth, inflation and unemployment figures released this week, which is why we sought to dispel such expectations as overdone well before recent developments.

Rather, we see the talk of increasing the ECB’s step size as little more than the effort of a vocal minority within the Council.

Vocal, but small. Beyond the obvious handful of names, it is difficult to find any member of the Governing Council who appears predisposed toward a large move by the ECB.

Most Governing Council members simply do not see a case for a 50bp cut and even fret that such a move would convey what they see as the misguided and potentially dangerous message that the ECB had somehow concluded that it was behind the curve, when in their view it is neither behind the curve nor at particular risk of allowing itself to get there.

The opposing view is championed most notably by Banque de France Governor François Villeroy de Galhau, and here we digress briefly to pay tribute to Villeroy’s love affair with the word ‘pragmatism’, which is nothing if not enduring.

It is readily established that, going back years, he is the Council member far and away most apt to use the word or its derivatives in public pronouncements.

What does it mean? It means - to borrow from Lewis Carroll - just what he chooses it to mean, a versatility that goes a long way towards explaining his fondness for the term.

Lest anyone foolishly misconstrue it as a plea for caution in view of data not all pointing in the same direction, Villeroy has taken since last spring to pairing the word with ‘agile’ (or ‘agility’). It being hard to demonstrate agility without moving, this should dispel any illusions about ‘pragmatism’ being consistent with inaction.

We thus get from him the following, for example, in which ‘full optionality’ is a thinly disguised plea not to apply any upper limit a priori to the size of interest rate cuts:

‘For the near future, I plead for agile pragmatism in the further reduction of our restrictive bias’, he said in a speech on 22 October. ‘Pragmatism, with full optionality for each of our future meetings, based on incoming data and forecasts. And agile: we are not behind the curve today, but agility should prevent us from running such a risk in the future.

Naturally, Villeroy is not alone with his ill-concealed preference for withdrawing monetary restriction in leaps and bounds. Banca d’Italia Governor Fabio Panetta and Banco de Portugal Governor Mário Centeno can only be delighted to have enlisted such prominent support for the cause of looser policy.

Unfortunately for them and a couple of others in the same camp, they are, as noted, outnumbered to such a degree that it would require significant further weakening of the (recently slightly stronger) data to make 50bp six weeks hence realistic.

That said, the doves can take comfort in the fact that, from today’s perspective, they can probably still count on a 25bp consolation prize in December. This is despite the fact that their colleagues generally regard October’s cut as having already taken into account the downward revision of the inflation projection seen as likely in December.

That is, the faster return to price stability widely expected to be confirmed by the next projections (no one explicitly said in 1Q) would allow for a faster - not rushed - return to neutral interest rates. This is seen even by hawkish Council members as inconsistent with treating the October cut as nothing more than the December cut brought forward in time.

Still, the latest data underscore the point we made on 18 October that if developments reveal the October cut to have been unnecessary, then whether there is any December cut could yet become an open question.

There were of course some Council members who would have preferred to wait for more clarity anyway rather than cut in October, a nuance ECB President Christine Lagarde failed to communicate at the press conference in favour of reporting ‘unanimity’.

Her telling glossed over the gulf between those Council members now agitating for 50bp in December and a significant swath of the Council that saw the decision for a 25bp cut as nothing more than a low-cost form of ‘insurance’ (a term we hear ECB Chief Economist Philip Lane used that day).

Some of the more sceptical Council members find, as we did and do, that Lagarde might have managed to convey a somewhat less dovish impression overall, rather than dwelling chiefly on Europe’s economic anaemia and thus – inadvertently, we assume – unduly inspiring markets.

This week’s data also reinforce what we wrote regarding Lagarde’s assertion that inflation would decline to the 2% target ‘in the course of next year’ rather than ‘over the second half of next year.’

We cautioned against any overinterpretation and suggested that the new wording be considered a ‘placeholder’ until the December projection exercise reveals to what extent inflation prospects have really improved.

In the final analysis, though, we would emphasise that even before the latest data, our reading is that it would have taken significantly more than what had already transpired to induce the ECB Governing Council to cut by 50bp on 12 December.