MNI SOURCES: ECB Mulls September Hawkish Pause, August CPI Key

The European Central Bank’s Sept 15 rate decision remains in the balance, though while even a pause is likely to be accompanied by language warning that inflation remains too high, some dovish Governing Council members are stressing growth fears and already looking to next year’s policy debates with talk of advancing cuts into the first quarter, Eurosystem sources told MNI.

More hawkish members will point to July’s unchanged core inflation of 5.5% and insist that August flash data due on the last day of the month will require improvement to avoid calls for another 25-basis-point hike in the deposit rate to 4% next month. Others on the Council note the downward trend in headline inflation to 5.3%, though it remains more than double the 2% target.

“It’s looking more and more like data is lining up for no hike in September, whether you call it a pause, or call it a halt....,” one official said, though he noted that even if the outcome is for no change the message from the ECB is unlikely to vary much from July’s message of continuing data-dependence.

KEEPING RATES RESTRICTIVE

“I'm sure the line will be along the lines of 'the data this month did not warrant a further hike in rates. Let's now wait and see where the data between now and the October meeting takes us,’” the source added.

Whether in the policy statement or in the following press conference, the ECB will again “underline the determination that rates will remain sufficiently restrictive for as long as needed to bring inflation to target,” he said, adding that it is impossible to say whether the deposit rate is already at its peak or whether it will reach this in September or in subsequent meetings, given the ECB’s data-dependence.

A rate increase in September might even risk soliciting a negative market reaction, a former senior ECB official said.

“I think that a 25-basis-point hike is difficult to justify on the basis of recent data, a hawkish pause would be my recommendation ... to avoid a (dovish) overreaction of bond markets,” the former official said. “If they go for 25 basis points, the reaction of bond markets is difficult to predict. Some analysts argue that higher risk of overkill could push long term rates down … This would not be a good outcome.”

Hawks, though, will insist that better price data are required to warrant a pause in September, with tangible progress required in underlying inflation statistics to be released on Aug 31, though one who spoke to MNI said they would go into the meeting with an open mind. (See MNI INTERVIEW: Wunsch Sees ECB Sept Hike Without Slide In Core)

WEAK PMI DATA

Still, storm clouds are gathering over the outlook, and sluggish growth and more evidence of slowing inflation measures could see the first clamour for cuts from some policymakers by as early as late in the first quarter of 2024, several officials said. While eurozone GDP grew by 0.3% quarter-on-quarter between April and June, purchasing manager data now points to contraction, with August’s composite PMI falling to 47. Germany's August IFO Business Climate index also surprised to the downside. (See MNI SOURCES: Data Deluge Clouds Early ECB September Rate Call)

“At the moment, that is a very long way from the thinking on the Governing Council, but an ongoing slowdown over the summer could quickly focus a few minds,” the first official said.

Others agreed that doves were likely to start calling for cuts in the first quarter, so long as underlying inflation continues on a downtrend.

“Data on the economy are weak. I still have difficulties in understanding some positive comments on second quarter GDP,” the former official said. “The last Governing Council admitted weakness in the near term, but confirmed its view of a strengthening over the projection horizon. I guess that the new projections will show a modest downward revision of growth and also of inflation.”

Not all will regard the prospects of an early move to rate cuts as probable, with hawks likely to demand a quicker move towards the inflation target than currently envisaged. Another source told MNI that it was premature to start even thinking about rate cuts and that the message should be maintained that rates will need to stay high – whether at current or higher levels - for a significant period.

A significant downward adjustment in the growth outlook would also be necessary to justify consideration of such a move, one source stressed. But the doves are already readying their arguments in anticipation of a negative change in the economic climate.

An ECB spokesperson declined to comment.