September 08, 2023 | 14:56
Got a Euro Coin?
Oh, to be a fly on the wall in Frankfurt when the ECB debates on monetary policy. It would be interesting at any given time, but particularly so ahead of the September 14 announcement. It will be a tough decision, for all parties.
Just before the one-week quiet period, a number of policymakers made their views known. For example, Belgium’s Wunsch mused that “we may need to do a little bit more” but he, along with other hawks such as Germany’s Nagel and Estonia’s Muller, will not have a vote in September. But there are others. The Netherlands’ Knot, after wavering a few weeks ago, seems to have reverted back to his hawkish ways when he warned that markets may be underestimating the chances of a rate hike. He does not want to delay the timing of returning inflation back to 2% and “wouldn’t mind so much if it shifted forward a little bit.” Slovakia’s Kazimir was more blunt: the ECB should take “one more step”, which is better than pausing now and tightening later. And of course, the head hawk himself, Austria’s Holzmann, declared that absent any big surprises, “I see a case for pushing on with rate increases without taking a pause” and that there could be “another hike or two”. Even Portugal’s normally dovish Centeno warned that “even if there is a pause, saying we are done would be the wrong message.” France’s Villeroy de Galhau and Finland’s Valimaki, whose views are more middle-of-the-road, kept their cards close, simply stating that their options are open. Chief Economist Lane, a dove, sounded more optimistic with his view that core CPI will be slowing in coming months. Vice-President de Guindos said that the decision was “still up for debate”.
For a time, all policymakers were hawkish, in varying degrees. Back in May, President Lagarde plainly stated “we are not pausing” and there is “more ground to cover”. She did not say that in July. In fact, she warned that they may hike, or they may pause, but they will not cut. Caution is returning.
The ECB now faces a number of issues. One of Europe’s biggest trading partners, China, is facing a lot of headwinds, and its growth prospects have been chopped. That is bad news for the Euro Area economy. It has, up till now, avoided a technical recession, but momentum is slowing. Real GDP in Q2 was revised down sharply, from the initial estimate of +0.3% q/q (or 1.1% annualized), to +0.1% q/q (or 0.5% annualized), dragged down by exports. And Germany, the former star performer, could contract in Q3, given hefty declines in July factory orders (-11.7%) and industrial production (-0.8%), and two consecutive contractions in the composite PMI. In any event, expect staff projections for GDP to be revised down this year and next, along with a corresponding hit to inflation. (Note that the credibility of the ECB’s forecasters is at stake. In March, their core CPI forecasts were seen as “outdated” and they seemed to overcompensate in June with huge upward revisions. Then, President Lagarde recently warned of the hit to confidence in the central bank as its economic forecasts haven’t been very accurate.) Headline inflation has been slashed from its October 2022 record high of 10.7%, but it has been stuck at 1½-year lows of 5.3% for the last two months. Core inflation was stuck at 5.5% in June and July, but managed to ease to 5.3% in August.
Is that enough to hold back the wolves? Depends who you ask. We still see the ECB holding back in the face of rising economic uncertainty, but with a hawkish Statement. At the end of the day, it will be a coin toss.