The “for longer” round. On the one hand, the ECB should care mainly (or only) about inflation, and the NSA data of core HICP have been solid. Not only, but the model-based forecast and the “acquired inflation / carryover effect” analyses continue to signal upside risks around the ECB/NCBs staff forecast. However, on the other hand, the slowdown of economic activity is probably a concern for some Governing Council (GC) members. We continue to think that the probability of a hike is non-trivial, although we would understand the reason for a pause (in any case: gun pointed to our head, we would bet on a hike). Most importantly, we think that in these conditions, the ECB staff will not fold-in major revisions to its forecast, as it is too early to call for a recession (US docet) and nothing really says that -net of a recession- the ECB can hit 2% by 2025. For this reason, whether the GC will go for a hike or not, in our view it is reasonable to signal a “for longer” phase, until it will become clear what side dominates. Put it simply: we expect the September round to be a meeting with a message for the long-end of the curve more than for the front-end.
(An important note: in the last year, we have been arguing against consensus that the Euro area inflation was not “supply-driven”, that the EA labor market was very tight, and that fiscal policy was part of the story (in this sense, we are glad that Isabel Schnabel has embraced the correct narrative). Recent developments on the fiscal front are significant, as some countries (i.e. Italy, Germany) have announced or partially implemented some form of fiscal consolidation. We have not assessed the implications for the Euro area yet, as we wait to see the new ECB staff forecasts. But it is reasonable at this point that, should fiscal help continue, core inflation in 2024 will be significantly lower than now.)
Main points:
- The incoming data on core HICP have been solid. Core HICP (NSA) in 2023 continues to follow closely the 2022 path. There are tentative signs of disinflation in core goods but they are offset by the strength in core services.
Figure 1. Evolution of cumulative (unchained) core HICP by year.
- We expect the ECB staff forecast to be little changed. The models continue to signal that the NCBs staff forecast in the June macroeconomic projection was too low. However, the assumption was that the Euro area could avoid a recession, something that has become unclear. A possible compromise could be to make only cosmetic changes to the forecast this round and wait until December.
Figure 2. Evolution of the forecast (average YoY): “main” model vs ECB/NCBs staff
- The Taylor rules imply a terminal rate a bit above 4%. Under several specifications, it is hard to get a terminal rate below 4%. More importantly, the Taylor rules continue to signal a “for long(er)” path of the deposit rate, which we expect to be the main message this round.
Figure 3. Taylor rules
