The ECB’s July meeting and President Christine Lagarde’s remarks at the press conference signalled that the threshold for another rate cut remains high. In fact, the ECB feels very comfortable in what Lagarde called a ‘good place’ at the June meeting. The just-released minutes of the July meeting show an ECB that saw risks to the inflation outlook as balanced but still had a slight easing bias.
Here are the most important statements from the minutes:
Risks to economic growth remain tilted to the downside. “Among the main risks were a further escalation in global trade tensions and associated uncertainties, which could dampen exports and drag down investment and consumption”.
Discussion on trade tensions. “The effective level of tariffs for the euro area was probably going to be higher than assumed in the baseline scenario of the June staff macroeconomic projections, but not as high as in the severe scenario.” It was commented that markets appeared to be reacting less to tariff news, especially when compared with developments in April.
Long discussion on exchange rate developments. “The impact of exchange rates on output and inflation depended on the nature and duration of the underlying shocks and drivers, and ït was argued that the pass-through to consumer prices was likely to be limited as the dampening effect from lower import prices might be partly offset by stronger price pressures from rising domestic demand.”
The ECB is still concerned about uncertainty. “There was considerable discussion on the role of uncertainty, which remained very high, related both to trade policy and geopolitics.”
While the ECB refrained from giving a risk assessment for the inflation outlook in the introductory statement, the minutes stated that “most members viewed the risks surrounding the inflation outlook as broadly balanced.” Also, “inflation was expected to be at target in the medium term despite continued and historically high uncertainty regarding the outlook owing to the volatile global trade policy environment.”
A more controversial debate on the inflation outlook, as “several members viewed inflation risks as tilted to the downside relative to the June staff projections, at least for the next two years”, while “a few members judged risks to be tilted to the upside relative to the June staff projections, especially over the medium term.”
Rate cut option must have been on the table in July, as the minutes said that “while a view was expressed that the current conditions would also be consistent with a further rate cut, owing to increasing downside risks to output and inflation”.
All in all, the minutes confirm the ECB’s wait-and-see stance, with a touch of an easing bias. Maybe the most interesting piece of information from the minutes is the fact that at least one ECB member seemed to have been in favour of a rate cut in July.
Bar has been set high, but rate cut at September meeting still not off the table
Looking ahead, today’s minutes, as well as official ECB comments over the last few days, have stressed that the bar for yet another ECB rate cut is set high.
When the ECB returned from its summer break, at least at first glance, several more favourable developments had strengthened the wait-and-see stance: the ‘it-could-have-been-worse’ trade agreement between the US and the EU, a weak-but-not-disastrous second quarter GDP growth reading, as well as still improving business sentiment indicators which have rather strengthened than weakened the case for staying on hold at the September meeting.
However, we think that it is still too early to rule out a September cut. Why? First of all, the ECB doves have been very silent since the end of the summer break, and it has been the traditional ECB hawks trying to shape the policy debate. Also, there is a growing awareness among eurozone policymakers in general that the trade framework agreement between the US and the EU is anything but carved in stone. The built-in conditionality on many aspects has left sufficient room for new escalations.
And, finally, there is a handful of arguments that a too hawkish stance could eventually backfire and increase the risk of inflation undershooting. As ECB staff are currently also preparing a fresh round of macro projections for the September meeting, the euro has gained another 2% since the June projections, bond yields are up by some 30bp and French public finances are back on markets’ radar screens. And even if the ECB fiercely disputes that it reacts to monetary policy in other countries, a Fed starting an aggressive series of rate cuts would only add to the risks of inflation undershooting.
All in all, and even if it might be counterintuitive given the resilience of the eurozone economy, we still wouldn’t rule out another insurance rate cut, following the principle that it wouldn’t do any harm but could eventually do good.
Source: ING
