MNI SOURCES: Hawks Aim For ECB Hike Before Data Ties Hands

ECB policy hawks are circling for what could be their last data-based window to move the key deposit rate higher, pushing back against Governing Council members arguing for a pause to take stock of the nine consecutive hikes and their impact on the now-slowing eurozone economy, well-placed sources told MNI.

Exchanges are expected among top ECB policymakers over the weekend to fashion a winning proposal that Chief Economist Philip Lane can present to the Governing Council. In addition to the actual rate decision, securing coherence among policymakers over future policy signalling and the relationship to the current data-dependent approach is seen as crucial.

The debate centres on the speed of slowing inflation and whether to go for a hawkish pause at 3.75% or a hike to 4% “with a less hawkish twist”, as one source put it, reflecting an emerging recognition that Governing Council members are not that far apart with relatively few nailing their colours to the mast.

CORE ISSUE

Slowing, but still-high and sticky core inflation remains the main hook for those still arguing for another hike. One eurosystem source said they were “not yet comfortable” with the incoming price data, while another said there are still “upside risks” to the core inflation outlook and stopping, then having to start hiking again, would be more damaging than a move to 4% now.

Another eurosystem source said the August inflation data hadn’t shifted the goalposts far in either direction, with all camps finding some morsels to back their arguments. The ECB’s September staff inflation projections – where near-term headline numbers could again be subjected to energy price rises -- will therefore be key.

This is where the hawks see mileage in their arguments for an additional rate hike, as, accepting still sticky core prices are on a downward trajectory, they say the pace is painfully slow and the outlook for next year onwards is still opaque as wage demands remain elevated. They continue to argue for hitting the 2% inflation goal by the end of 2024 and not slipping into 2025.

Doves expect the fresh projections to show inflation in the ‘medium term’ to be closer to 2% than before and concede that reinforcing expectations of a signification drop in core CPI after the summer will be key. This would then open the door to the ‘safer’ option of a pause to buy time to assess the weight of the economic downturn.

CLOSE CALL

“It’s a close call between unchanged rates and another 25 bps hike this month. How the outcome is sold in the post-meet press conference will likely be the main event and future expectations will be a big deciding factor in how the decision goes,” the last eurosystem official cited told MNI. “The downward GDP revisions and the sluggish PMIs certainly suggest transmission is working through to the real economy. However, the inflation data, even with core moving the right way, is currently not on a quick enough downward trajectory to please everybody.”

Either decision would present a communications challenge, the source said, observing that a hike coupled with a pretty much done signal would not fit well with the current data-dependent policy stance. While pausing and saying another hike remained firmly on the table if data were to point that way would be easier to lay out, there would be a risk that financial markets could take this as an unintended signal that Frankfurt was done.

Those arguing for hikes “may see this as a last chance to push through another 25bps increase before inflation dynamics turn against them. If they miss September, there will be little new in October and by December, the data should show underlying inflation markedly lower,” he said.

GROWTH ANXIETY

After President Christine Lagarde opened the way to a pause this month at the July post-meeting press conference, some national central bank contacts have indicated to MNI that the time is ripe for at least a hiking pit-stop.

“We are very close to finishing so the divisions among the Council are less important than it seems. But it’s the first time since it started that we are going to a meeting without a clear or previous indication of a most likely outcome,” another source told MNI. “Having said that I think we should see a pause coming out from the meeting. I don’t think it is a unanimous view, but it is the one that gives us most optionality at this moment.”

The time for a pause was certainly picked up on by a group of NCBs, who all pointed to inflation at last moving in the right direction, with even core now on a track to take it lower over coming months. For this group, the concern had shifted to weakening economic activity with the latest revision to eurozone GDP data showing the economy barely eked out growth in Q2.

An ECB spokesperson declined to comment.