The last time the ECB met, the result was what the headlines called a “hawkish cut”. That’s because the easing was widely expected, and was followed up by assurances that the ECB would stick to the data. And the data at the time (and since) shows inflation is still a problem. So, what does that mean for the next ECB Rate Decision meeting?
Well, the overwhelming majority consensus is that the ECB will pause, and keep policy as is. The ostensible reason is to give the market time to process the change and see what effects it has. That certainly is a factor, but after the central bank started its easing process, then the pressure to move away from tightening has been substantially alleviated.
We’re Moving. Slowly.
Something that was echoed by Chief Economist Philip Lane in the days after the meeting, and repeated in the weeks after is the importance of a slow pace. Lane was a strong advocate for rate cutting right until the June meeting. But once done, he suggested that the right direction had been started, and that now was the time for caution. The doves got their way last time, now it’s the hawks’ turn.
ECB President Christine Lagarde said after the last meeting that monetary policy would be decided on a “meeting by meeting” basis. In theory, that means each time the central bank gathers in Frankfurt, there is a chance of a change in monetary policy. In practice, the economic situation hasn’t changed all that much, meaning that neither will policy.
Where To, Now?
Inflation remains above target, and the economy is growing at a disappointing rate. This is a difficult spot for any central bank, even if neither indicator implies that it meets the technical criteria to be “stagflation”. A rebound in the economy would likely increase inflationary pressures, but bringing down inflation would likely trigger a recession. So, how to split the difference?
The market is pricing in the next rate cut for September, which makes this meeting somewhat crucial. Not in the rate decision part, but in the accompanying statement, and particularly in Lagarde’s press conference. That’s because the ECB won’t meet in August, making September the next meeting. And if there will be some telegraphing of that happening, now would be the time to do it.
The Market Doesn’t Like Surprises
The ECB is notoriously cautious, and spent the better part of four months essentially letting the market know that it would cut rates in June. The question now is whether that counts as warning that further rate cuts are to be expected. If not, then it would be highly likely that Lagarde will say something that the market will likely interpret as confirmation or rejection of the September cut.
And that’s likely to be the main takeaway from the meeting. Delaying the cut until potentially October could give the Euro a bit of a boost, particularly against the dollar and pound, as markets are looking for a cut from those central banks a little earlier than that. But raising expectations for a cut in September could also weaken the Euro, as the market isn’t totally convinced that the ECB will move that fast.