White flag. The crusade of the president of the European Central Bank (ECB), Christine Lagarde, to maintain tension with expectations of future interest rate hikes in the euro zone in September came down this Thursday with the change in tone of her speech, which He went from being meek in July after the aggressiveness shown in the May and June meeting. The head of monetary policy drew a pessimistic scenario for the European economy, in which inflation does not stop falling and financing conditions for companies and households are uphill. “Inflation is still falling, but it is still expected to stay too high for too long,” she said.
In the absence of new forecasts, the macro picture that Lagarde painted with a funeral tone was the following: “The short-term economic outlook for the euro area has deteriorated, largely due to weaker domestic demand. High inflation and tighter financing conditions are holding back spending This is weighing particularly heavily on manufacturing output, which is also held back by weak foreign demand Housing and business investment is also showing signs of weakness Services continue to grow resilient, especially in intensive subsectors like tourism But momentum is slowing and the economy is expected to remain weak in the near term.”
“The ECB once again risks being left behind. This time not by being too inflation-friendly, but by being too optimistic and too benign about the economic impact of its own policy measures.”
Previously, the ECB raised interest rates for the ninth consecutive meeting until taking them to 4.25%, each time closer to placing them above inflation, which next Monday, when Eurostat publishes the data, will exceed 5%. There are countries like Spain that are well below that level with an estimated CPI for July of 1.6%, according to the forecasts for this Friday. At this point, Lagarde repeated twice that the rates will be at “sufficiently restrictive levels for as long as necessary” to lower it to 2%. Does this mean that rates will rise more? “We are keeping an open mind regarding the decisions we will make in September and in subsequent meetings. We could raise rates or keep them, it can be a hike or a pause,” he stressed.
Pause vibes at the ECB
There were details that reinforced the thesis that now the ECB is not so clear that it is going to raise interest rates after the summer. Only the fact that Lagarde put on the table the possibility of a break made analysts look for more clues in his language, beyond the cold outlook he sees in the European economy. Eduardo Cobián, deputy director of the Creand Family Office, emphasizes a nuance of the official statement, the particular signal language of central banks.
“There is a certain change in the language used by the ECB in the June meeting and in the current one. In the previous one, they indicated that the rates would ‘rise’ to sufficiently restrictive levels to reach inflation of 2%, in on this occasion it has indicated that the rates “will be set” at sufficiently restrictive levels, that is, the body has gone from saying that the rates will continue to rise to that they will remain at high levels a certain depreciation of the euro and that the yield of the bonds sovereigns fall,” he explains.
For Konstantin Veit, portfolio manager at PIMCO, a tougher stance from the ECB is still missing, although it may not be with rates: “We believe that for inflation to fully normalize again towards the 2% target set by the ECB, it is further strengthening of the economy and some weakness in the labor market likely to be necessary We expect the ECB to reduce PEPP reinvestments early, possibly as soon as this year Do not think that the ECB will categorically rule out selling its bond holdings, but instead will continue to focus on a gradual and orderly passive reduction of reinvestments.”
“After the June pre-announcement (for July), it was difficult for the ECB not to raise interest rates today. The central bank has been too explicit that the risk of stopping rate hikes prematurely is much higher than going too far. However, the recent batch of negative data from the Eurozone (PMI, IFO, loans…) must have had a terrifying impact on confidence in the EuroTower”, predicts Carsten Brzeski, Global Head of Macro at ING Research. Indeed, the ECB once again risks being left behind. This time not for being too easy on inflation, but for being too optimistic and too easy on the economic impact of their own policy measures,” he adds.
