September 01, 2023 | 13:54
ECB Will Keep an Open Mind
It’s not easy being a central banker. Especially if you’re with the ECB.
Remember the ECB’s July meeting? We (or maybe it was just me) were reeling from the fact that the bank suddenly lowered its hawkishness by a few degrees. (“What just happened?”) Then, after regaining consciousness, we looked forward with great anticipation to the two new CPI reports that the ECB would digest, that would give them clear guidance, like a shining star, like the Super Moon, on what to do on September 14.
How naive to think that it would actually be so easy. Both the July and August reports have shown some improvement, but whether or not it is enough to convince the majority of policymakers to back a ‘no move’ choice remains to be seen. Headline CPI is at an 18-month low of 5.3%, but it has been parked there for the past two months. Core CPI didn’t budge in July, and though it ticked lower in August to 5.3%, that is still very close to March’s record 5.7% pace. And, both measures are still more than double the official target.
So, it is all about keeping an open mind ahead of the meeting. At least, that is according to the Minutes from July’s meeting. There was plenty of discussion, as usual, but there seemed to be more varying views expressed. “On one side”, there was an argument made that a September rate hike “would be necessary if there was no convincing evidence that the effect” of all the rate hikes was enough to lower underlying inflation. “On the other side”, some policymakers said that the upcoming staff projections could show a downward revision to inflation, with the path headed for 2%, “without the need for another interest rate hike in September”. Of course, at the end, all members gave a nod to the 25 bp hike. But for September, given the “highly uncertain” outlook for inflation and for economic growth, they will “keep an open mind” on what to do.
Is that possible? Aren’t some naturally inclined to lean in one direction? We finally heard from Austria’s Robert Holzmann this week and he made two noteworthy points. First, “If there aren’t any big surprises, I see a case for pushing on with rate increases without taking a pause.” Second, he used the phrase “another hike or two”. Gosh… I wonder which way he is leaning? Then there was Finland’s Tuomas Valimaki, who said they’re “totally open” and everything depends on the data. On the dovish side, Vice-President Luis De Guindos said they’re at the finishing stretch of the rate hike process, but that the September decision is still up for debate. And, France’s François Villeroy de Galhau said that “options are open” but “we are close or very close to the peak.”
How will this story end? We continue to lean on the “let’s take a break” side, but with plenty of qualifiers during the press conference and/or statement… with the message that a pause does not mean that it is over.