Thoughts

October 20, 2023 | 12:55

ECB Preview: Break for Pause

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)

The ECB has tightened monetary policy for ten meetings in a row, by a combined 450 bps. And with the more recent moves, the Governing Council has become less hawkish. At the last meeting in September, the decision to hike 25 bps versus pausing was a “close call” and “tactical considerations also played a role”. It's not clear what those considerations are but the comment that the central bank did not want to be viewed as “weak” was interesting. In terms of the risks, whether the ECB tightens “too much” or “too little” were now seen as “more balanced”. For those pro-hikers, raising rates would show how determined they are in bringing inflation back to 2% in a “timely manner”. For those anti-hikers, the data are simply “not supporting a further rate hike”.

Since that meeting, consumer price inflation has slowed to a 23-month low of 4.3% in September, far from last October’s record high of 10.6%. Core CPI has also eased, but the improvement to a 13-month low of 4.5% is still not too far from March’s record high of 5.7%. The ECB’s one- and three-year CPI expectations survey showed a modest uptick in the latest month. And, though the Euro Area’s composite PMI improved in September, it has spent four straight months below the key 50 mark. Let’s not forget some trade tensions with China, the ongoing war in Ukraine, and now, turmoil in the Middle East.

In the days ahead of the “quiet period”, over half of the Governing Council members shared their views with the public. Although the main hawks are still adamant that inflation be returned to target quickly (example: Austria’s Holzmann warned “we may have to hike another time or perhaps two times”; Germany’s Nagel said they “won’t rest” until that happens), some of the hawks have backed off. Latvia’s Kazaks seems open to a pause. “At this point, we can certainly count on the fact that we can also pause.” And the Netherlands’ Knot feels that “policy is in a good place now”.

We still lean towards a pause.