Dispatch€s from Frankfurt: Back on Track
Towards a September cut
Today’s statement and press conference suggest that the governing council has regained confidence in the inflation trend delivering a return to target “in a timely manner” – confirming that a September cut, while not predetermined, is the most likely outcome.
The policy statement slightly unusually reprises the May as well as the June developments in underlying inflation, the intention probably being to provide a sense of perspective, which underscores the regained confidence in the inflation trend.
The council also affirmed that the low frequency determinants of inflation remain on track, as profits are buffering the still strong growth in wages. In fact, President Lagarde in the presser chose to express a very high degree of conviction also in wages receding sufficiently for inflation to come in line with the target.
While I have some strong doubts, given workers’ strong bargaining position on account of the tightness of the labor market, this is a question for early next year and beyond (and for the terminal rate), rather than for the immediate future.
source: Eurostat, Macrobond, Thin Ice Macroeconomics calculations
All of this makes the tone of the June meeting communication – worried and doubtful about the inflation trend – increasingly look like an aberration, and confirms in my eyes that the council as a whole sees the June cut as ex post vindicated by the data.
This leaves a further cut in September as the most likely outcome, in my view, of course subject to there being no unpleasant surprises in the data until then (and the September staff forecasts confirming inflation as on track).
Naturally, the council attempted to channel an almost radical degree of data dependence – the President said September was “wide open” – but I think this is more the result of the unfortunate communication circumstances surrounding the June move. Her high degree of conviction on wages in particular is at odds with a genuine lack of easing bias for September, in my opinion. The overall sense I got was that the council just needs to see “more of the same” to cut.