Thoughts

August 25, 2023 | 14:31

ECB: Not a Done Deal Yet

Economist

Jennifer Lee

Senior Economist and Managing Director
Economics

Jennifer has been wi... (Read more)

Jennifer Lee

Senior Economist and Managing Director
Economics

Jennifer has been wi... (Read more)

It's been a pretty wild week considering it is late August. Whatever happended to summer doldrums? That is so last decade! There was plenty of drama, suspense and intrigue on the political stage. For example, the BRICS expanded for the first time in 13 years, adding Argentina, Egypt, Iran, Ethiopia, Saudi Arabia, and the UAE to the roster and boosting the group’s share of global GDP from 32.1% to 36.9%, on a PPP basis (and far bigger than the G7’s 29.9%).

Similar theatrics played out in financial markets in the lead-up to Fed Chair Powell’s opening remarks at the KC Fed’s annual economic gathering in Jackson Hole, WY. But it was not just the Fed Chair who has the spotlight. ECB President Lagarde will take the stage in a lunchtime address, opining on the “European and Global Economy”. That also has potential to be market-moving, particularly as the next ECB meeting has the market debating “will they or won’t they” raise rates. Up until the last meeting in July, the ECB was seen as the uber-hawk, with a clear majority of central bankers in the Governing Council setting expectations for more hikes, even as its counterparts elsewhere appeared to be packing things up. Then in July, the extreme hawkishness was reined in, starting with President Lagarde, as she warned that they may or may not hike in September. Others also toned down their views, with the most notable change coming from the Netherlands’ Knot. However, whilst in Jackson Hole, two Governing Council members spoke to the press, ahead of the ECB President’s speech. Germany’s Nagel acknowledged that he needs more data before he decides on September’s move, but “it is much too early” to think about pausing. Interesting coming from this central banker, as Germany’s economy is viewed as the weak link in Europe: it just barely emerged from recession and prospects for the rest of the year aren’t too optimistic given its exposure to China. Also, Germany’s composite PMI measure, sitting at a 3-year low, suggests that the economy shrank in early Q3. Croatia’s Vujcic also chimed in, stating that “we are now certainly in the restrictive territory but whether we are in a restrictive-enough territory remains to be seen.” BMO’s view is that the ECB will take a pass at the September monetary policy meeting but the debate will, as usual, be heated.

So, there are a few items to watch for in the final week of August. The preliminary Euro Area August CPI, due August 31, will be dissected every which way to Sunday, as it is the last CPI report before the September meeting. Although both the headline and core measures are expected to recede further, any signs of stickiness will throw shade on the doves. Also, give the Minutes from the ECB’s July meeting a read on Thursday to understand what exactly prompted the turn away from the hawkish side. Separately, the RBA looks to be finished and is expected to stay on the sidelines for the third consecutive meeting in September. How inflation behaves will have a big say, so watch Australia’s July CPI report mid-week. A third month of cooling price pressures will give some comfort to Governor Lowe as he wraps up his term at the central bank.