ECB Watch – ECB makes way for September hike
The ECB left its key policy rates unchanged at today’s Governing Council meeting, as was widely expected.
The deposit rate therefore remains at 2.25%. When it comes to the inflation outlook, the accompanying statement emphasized that “Uncertainty remains high and the full inflationary impact of the energy shock has yet to play out”. We continue to expect the ECB to hike its deposit rate once more at the next September meeting, by an additional 25bp taking it to 2.50%.
While today's decision was widely expected, attention was focused on how the Governing Council assessed the renewed rise in energy prices following the re-escalation of the war in Iran. The ECB indicated that risks to the inflation outlook are now to the upside. This marks a change from the message delivered in Sintra in early July, where President Lagarde suggested that risks to inflation were still to the upside but had eased.
More specifically on energy prices, in today’s statement, the ECB noted that “the outlook for energy prices, while highly volatile, currently stands close to the baseline of the June Eurosystem staff projections and well above the levels recorded prior to the conflict in the Middle East”. This is more the case for oil as it is for gas. Gas prices in the last two weeks have risen above those assumptions. Indeed, whereas the June projections were based on prices around EUR 45-50/MWh during the middle of this year, TTF front-month gas prices are currently trading above EUR 60/MWh. This suggests that risks to the inflation outlook to have moved somewhat to the upside compared to the June projections which were predicated on the deposit rate going to at least 2.75% and had core inflation slightly above target in the forecasting horizon.
President Lagarde was also confronted with questions about her future at the ECB. While her term does not expire until October 2027, recent remarks concerning French politics have prompted speculation that she could leave before the end of her mandate. However, she pushed back against such suggestions, remarking that "this captain is staying on this ship as long as there are clouds on the horizon”. Still leaving open the chance of an earlier exit somewhere in 2027, just not in the near term.
Overall, we believe today's Governing Council meeting paved the way for a September hike. By then, policymakers will not only have a fresh round of staff projections, but also greater clarity on recent developments in energy markets. In addition, they will have two further inflation releases, second-quarter GDP data and a range of survey evidence to assess both the extent of broader inflationary spillovers and the impact on economic activity. We already expected the ECB to deliver a final 25bp rate hike in September, taking the deposit rate to 2.5%. Recent developments in energy markets and the associated upside risks to inflation only strengthen the case for that move and increase our conviction in this call. Our base case assumes that a renewed ceasefire will eventually lead to lower energy prices. If that does not happen, at least one further hike after the expected September move would become likely. (Jan-Paul van de Kerke, Nick Kounis)