MNI SOURCES: Data Deluge Clouds Early ECB September Rate Call

While the ECB is set to hike its main policy rates by 25 basis points in July barring a major surprise, consensus is building that the Governing Council must see the slew of economic data due through early September before deciding on its next move and avoid pre-committing to a hike at the next meeting, Eurosystem sources told MNI.

Those on both sides of the hike or pause argument accept that the data after the July meeting, which will include both July and August inflation, flash second quarter GDP, two rounds of final PMI surveys and unemployment through the end of June, will be decisive, as will the ECB's own September projections.

“I certainly don't see a pre-committal to a September decision [at the July meeting], as why be hostages to fortune of the data?” one Eurosystem source told MNI.

“There will be no doubt left that the fight against inflation goes on, policy has more work to do, but the decision in September will depend on the incoming data and not be preannounced,” the source added.

CORE INFLATION

Headline inflation fell again in June, the latest data from Eurostat showed on Friday after MNI spoke to the sources, dipping to 5.5% from 6.1% in May. However, core inflation, a better measure of underlying price pressures, edged higher to 5.4%.

While core prices are expected to slow, the pace of decline over the summer may not be enough to convince all Governing Council members that a pause is needed after July’s likely hike in the deposit rate to 3.75%.

“Both headline and core inflation are going to decline over the next months, although perhaps in the case of core, it's going to be stickier, but it's going to decline,” another source told MNI, adding that policymakers’ attention was focussed not only on September but on the horizon beyond.

Even within the context of a slower overall inflation outlook, the upcoming data could be noisy. Manufactured goods prices will weigh on core prices, but services, particularly if the expected summer boom is seen in holiday hotspots, will likely fuel upward pressure.

“I am on the fence for September… I see the case for both hiking or not. Our effect on economic activity and growth is starting to have effects,” another eurosystem source said. That, the source said, is why it is premature to discuss a September decision.

Underlining the mixed messages expected from the data, another Eurosystem source said the ECB has underestimated inflation previously and “we will overestimate at some point but we are not there yet.” Despite being fully behind a July hike, the source added that more data was necessary for a September decision.

SLOWING ECONOMY

The growth outlook is also becoming a bigger factor in the thinking of some policymakers, as the eurozone heads for a third consecutive quarter of contraction.

“PMIs, soft indicators… growth is, it was negative in the first quarter of the year, and, you know, the second quarter is going to be quite similar. And I do not see, I do not see why it should improve in the second half of the year,” the second source added.

The slowdown in activity is largely due to external factors, including China, a fourth source added, though he noted that this was “possibly because monetary policy is starting to do its job.”

As the Governing Council continues to discuss the speed of transmission – a key topic at the ECB’s Sintra Forum on Central Banking –signs of a slowing economy will fuel that debate, particularly if the services sector starts to decelerate at a similar rate to manufacturing.

An ECB spokesperson declined to comment.