ECB July 2024 Post-Mortem: Burn after Reading

The very definition of a snoozer...

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• Burn after reading because the meeting was such a snoozer that it’s (almost) not worth your effort to read this Post-Mortem. Yes, there are honest analysts out there...

• Ruminations aside, the only thing worth discussing is the changes in the fine print of the ECB statement. Since there was no change in rates nor in the forward guidance (there is no guidance, except that the ECB will decide on a meeting-by-meeting basis to cut or hold), we’re left with dissecting minor changes in wording, or a comma here and there.

• The ECB downgraded its assessment of economic growth to risks are tilted to the downside. That was a dovish surprise for me. I had expected the ECB to look through the recent PMI data (amongst other data) that suggests that the Eurozone economy came close to stalling by the summer. There are bound to be bumps in the road that is the economic recovery. But there you have it.

• Furthermore, President Lagarde was quite explicit in looking through strong wage increases. Remember, those wage increases that the ECB wanted to gauge first in the spring for before cutting rates in June. These days, the ECB sees inflationary wage growth (i.e. wage growth of four percent plus) as a reflection of workers still busy trying to catch up with the post-pandemic increase in the price level. A work in progress on multiple fronts I can attest. Furthermore, the ECB’s telephone survey of corporates (a Beige Book type survey) suggests that wage demands will ease the next year and the year thereafter. Or so the ECB is told.

• Which brings us to the question if the ECB is going to cut or hold in September. “Wide open”, Lagarde blurted out. It depends on the data according to Lagarde & Co. Or, translated from central banker jargon/code to plain English: we don’t know.

• I think they will cut by 25bps (which is consensus these days). For starters, there is the oft-mentioned narrowing of the spread between the deposit rate and the rate on weekly main refinancing. The latter will be cut by 35bps. I don’t think the ECB can cut the main refinancing rate without also cutting the deposit rate. Otherwise, the ECB has a huge communication problem on its hand.

• Still, there are also fundamental reasons that justify a cut too – beyond a Fed rate cut that I expect that month. The Eurozone economic recovery remains lousy, as Lagarde & Co were forced to acknowledge today. I expect underlying inflation to ease further, and the recent household inflation expectations survey gives me plenty of confidence that inflation is headed lower. On the monetary side of things, bank lending remains weak, as is money growth (which has picked up though). Finally, we’re still in restrictive territory with regards to overnight rates. Real bond yields for five year and ten year tenors have remained broadly stable. If the ECB doesn’t validate market pricing of a cut, financial conditions will tighten. Which is unnecessary, given the aforementioned reasons (inflation headed lower, lousy recovery, weak bank lending etc).

• So, a September cut it is. December too (also 25bps), and March as well (also 25bps). For now, that’s where my forecast horizon ends.