Walter Bibikow
By Carsten Brzeski
Reverse to the Fed, the ECB ought to have had a relatively quiet summer season break. The message despatched on the July meeting has labored: it’s all about data dependency. Whatever the message, we’re nonetheless a bit amused when the ECB mentions data dependency as we had always thought that monitoring and assessing all on the market data is solely part of a central banker’s job description. Nonetheless, and maybe expectantly, the data releases throughout the eurozone as a result of the ECB’s July meeting nearly all stage to a weakening monetary outlook and slowing inflation. The right monetary backdrop for an extra cost decrease.
New forecasts will doubtless be key
Exact data is the one take into account determining the ECB’s cost alternative subsequent week. The alternative one is forecasts. Once more in June, the ECB’s macro forecasts had for the first time launched forward the timing and profile for the monetary restoration, anticipating growth to have returned to potential (0.4% quarter-on-quarter) already throughout the second quarter of 2024. On the same time, the ECB has develop right into a bit further cautious on inflation, seeing inflation returning to below 2% solely throughout the first quarter of 2026. The newest batch of macro forecasts to be launched subsequent week is liable to current broadly unchanged growth forecasts and probably a slight downward revision to inflation forecasts for 2025 and 2026, on the once more of lower oil prices and a stronger euro change cost.
Once more in June, the ECB had anticipated growth to return in at 0.9% this 12 months, 1.4% in 2025 and 1.6% in 2026. We’re a lot much less optimistic regarding the growth outlook, nevertheless solely remind you that it might not be the first time that the ECB would finally postpone the second of an eurozone restoration. As regards inflation, the ECB in June anticipated headline inflation to return in at 2.5% this 12 months, 2.2% in 2025 and 1.9% in 2026. For us, these inflation forecasts had been barely too optimistic, as we depend on wage growth to remain bigger for longer and inflation to remain stickier. Almost evidently that for the ECB subsequent week, any downward revision to growth or inflation would enhance the chance of a further speedy tempo of cost cuts, whereas upward revisions would encourage the hawks to decelerate further cost cuts.
Technical factor
As considered one of many conclusions from the ECB’s evaluation of its operational framework, it had launched that by 18 September, the unfold between the refi and deposit cost may be lowered to 15bp, from 50bp at current. As such, this narrowing of the unfold might probably be interpreted as an easing of economic circumstances (though the precept refinancing operations are hardly used nowadays). Whereas this narrowing of the unfold would possibly theoretically be utilized by ECB hawks, for us, it isn’t a extremely convincing argument to keep up the deposit cost on preserve subsequent week. We nonetheless assume {{that a}} majority on the ECB would favor an outright decrease of all three protection fees.
No new forward steering
For subsequent week, fading inflationary pressures are the strongest argument in favour of 1 different cost decrease. On the same time, nonetheless extreme wage growth and nonetheless too extreme, albeit declining, selling value expectations counsel that the fight in opposition to inflation isn’t solely over however. It is going to make further cost decrease alternatives previous the September meeting initially further refined and controversial than at current priced in by financial markets. In consequence, we don’t depend on any new forward steering at subsequent week’s meeting. For now, the data-dependency narrative has labored, why change it.
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