By David Barwick – FRANKFURT (Econostream) – The European Central Bank’s main decision on June 11 stopped being the source of much suspense some time ago, with a 25bp rate hike the only reasonably probable outcome and the Governing Council likely to be unanimous, given the lack of any obvious dissenter.

The ECB’s tougher decision is how far, if at all, to encourage expectations of further tightening. President Christine Lagarde is likely to preserve the possibility of another hike by reiterating factors that could still require one, while stopping short of signaling that another increase is likely.

First, the data. It is true that against the backdrop of a more-persistent-than-hoped energy shock, some short- to medium-term inflation expectations have drifted, selling-price expectations have risen and the June projections are likely to show a somewhat less comfortable inflation-growth mix than the March round.

All that underpins a 25bp hike. But that’s only part of the story; the data also indicate slowing activity while failing to provide clear evidence of second-round effects – precisely the factors that have stayed the ECB’s hand up to now and had some Governing Council members hesitant about the wisdom of even one hike.

For example, on May 27, Vice President Luis de Guindos said that “the impact of this global energy shock … on growth is something that for sure the Governing Council is going to consider. ... And this reduction in domestic demand could ... reduce inflationary pressures.”

His mandate has since come to an end, but even Bank of Lithuania Governor Gediminas Šimkus, who in our May 28 interview left no doubt about his support for a hike, also said, “We need to react carefully, because the economy itself can act as a natural disinflationary force.”

Second, the high uncertainty. Some policymakers, like Šimkus, consider a second move “more likely than not.” But it’s a long way from there to regarding more tightening as a given – to say nothing of the possible timing. As Lagarde herself observed on May 9, “What defines the current circumstances is massive uncertainty.”

Third, nothing has changed about the ECB’s modus operandi: data-driven, meeting by meeting, no precommitting. Yes, Lagarde last time gave what one Council member has called “implicit forward guidance,” but given how close the gap was between the hold that emerged from that meeting and a decision to instead hike without further delay, her hint was reasonable. Barring new developments in the next 24 hours, such an argument for implicit forward guidance this time appears much weaker.

Finally, even public comments point against a preset sequence. Belgian National Bank Governor Pierre Wunsch last Wednesday said he had no “very strong feelings” about the post-June path, while Executive Board member Isabel Schnabel on June 1 said it was “too early to say that it’s a certain number of hikes and then it’s done.” On the dovish side, Central Bank of Cyprus Governor Christodoulos Patsalides said a June hike “doesn’t mean that we are entering a new cycle,” and Chief Economist Philip Lane said there was no need for “a complete vision for the future by June.”

For all these reasons, Lagarde would be well advised not to act as though June were the start of a series. The watchword here should be the phrase Austrian National Bank Governor Martin Kocher used in our interview a month ago to characterize his own inclination: not “one-and-done” – the arguments cut against certainty in that direction as well – but rather “one-and-watch.”

And calling the move an “insurance hike” would be a mistake unless heavily qualified. As we argued Tuesday in the context of Bank of Finland Governor Olli Rehn’s speech, the label captures the preventive logic of a June move, but risks implying that one hike should suffice. For Lagarde, conventional meeting-by-meeting language would be safer.

Nor is she likely to repeat her April 30 line that, “directionally,” she knows where the ECB is heading. That was defensible then, when the next move had already become relatively clear. After June, the direction will not be clear enough for a similar hint: another hike may be needed, but the ECB will not yet know when, or even with certainty whether.

A 50bp move won’t get serious traction. The ECB is not in catch-up mode and policymakers who until recently nurtured the hope of avoiding tightening altogether have little appetite for outsized steps. At most, any Council members willing to do 50bp could also live with 25bp and will not fight for the larger option.

Lagarde can and will still sound concerned, perhaps enough for some to think her hawkish. After all, even if the Middle East conflict ends, damage to energy infrastructure and supply chains will not vanish overnight, while short-term expectations have risen, firms look more willing to raise prices and 2022 memory effects remain valid concerns.

But reasons to hike in June are not necessarily reasons to hike again in July. The likely compromise is to act now, avoid sounding complacent and resist promises of anything, especially if tied to a date.

Šimkus was explicit on timing, saying after the first increase it would be “right to collect more data and not feel constrained by a very limited timeframe to act again immediately.”

That leaves July possible but not especially natural. There will be new data by then, and the ECB will not want to rule out any meeting in advance. But July is close enough to June that another move would require either a clear further deterioration or a Council judgment that waiting until September would risk falling behind the shock.

September is therefore the more plausible next point of decision, as both Šimkus and Kocher suggested and others indicated on background. That does not make a September hike certain; there are too many moving parts to see clearly that far ahead. But if inflation expectations continue to drift, firms keep signaling price increases and the medium-term outlook worsens, it would probably take either very favorable geopolitical and inflation developments, or a materially worse Eurozone economy, to prevent a second hike later in the year.

The Council’s unity should help. The hawk-dove divide looks less pronounced than in previous episodes, because June can be framed as a modest, timely and credibility-preserving move rather than as the start of a predetermined tightening cycle.

The operational framework is unlikely to compete for attention. Though a review is due this year, there is little reason to expect the Governing Council to open, let alone conclude, a substantive framework debate at a meeting dominated by the first hike of the new shock episode.

That leaves Lagarde with a narrow message: enough has happened to justify 25bp and keep the possibility of further tightening alive, but not enough to repeat her assurance that “directionally” she knows where the ECB is heading.