ECB Review: No commitment, no guidelines, no…thing

As widely expected, the Governing Council maintained the status-quo on policy rates. Communication wise, we had left the ECB on a surprisingly defensive footing last June. The tonality of today’s statement and the speech is slightly more dovish on substance, but at the same time very non-committal on the future direction 

The ECB seems to be in two minds. They want to trust signals from surveys that their disinflation scenario is unfolding, but hard data are not corroborating yet, and “domestic price pressure are still high, services inflation is elevated, and headline inflation is likely to remain above the target well into next year".

They are seeing some signs of improvement in the June flow, with "most measures of underlying inflation were either stable or edge down", while medium term indicators of wages (the main driver of services inflation) seem to provide some confidence: Ms Lagarde mentioned the results of the corporate telephone surveys (SAFE) for 2025 and 2026, or the Indeed wages indicators. On Ms Lagarde's WPP tryptic (wages-productivity-profits), she highlighted some preliminary improvement with productivity being less bad while unit profits turned negative in Q1. For our part, we think only wages will show substantial steps in the right direction this year – we are unsure about productivity and margins - but that is the most important component.

Last but not least, Ms Lagarde recognized that the +0.4% for Q2 GDP growth pencilled in in June forecast would not be achieved as they are now expecting something lower than in Q1 (+0.3%). She also emphasized the balance of risk on the real economy was negative.

September meeting

Yet, Christine Lagarde was adamant the ECB has not committed to any trajectory and qualified the outcome of the September meeting as “wide open”. We were hoping that a natural conclusion from their relatively benign analysis of the macro developments would be to open the door more explicitly than she did in June to another cut in September. There was not even a crack. We continue to believe the ECB will implement another rate cut in September, but it may be a closer call than we initially thought given Christine Lagarde’s tight-lipped performance this week.

In our baseline scenario, there might not be enough proof of deceleration in services inflation during the summer (still around 4% until August). This can however be enough for the ECB as they pencil in 2.7% for core inflation in Q3, the same level than in Q2. The level of confidence can also rise if their seasonally adjusted measure point to another deceleration on a 3-month annualised basis, as it did in June. On compensation per employee, the ECB is forecasting a stabilisation at around 5.1% after 5%. It lowers the bar to be negatively surprised. So, such figure could be enough as they seem to trust different forward-looking indicators (mentioned above), but the conversation at the Governing Council promises to be “lively”.

On the fiscal topic, it is also interesting to mention that Ms Lagarde was careful to point out they have added a sentence in the official statement "calling countries for EU member states to strengthen fiscal sustainability and the Eurogroup’s statement on the fiscal stance for the euro area in 2025". France has not been identified explicitly and it may be that the message directed to all countries under Excessive Deficit Procedure, but her insistence on the topic was notable, as she  reiterated the point during the Q&A.