The ECB's September Meeting: Hawkish Tilt or Dovish Pause?

Previewing the ECB's September meeting

The countdown is on until the next ECB meeting. Every day new macro information and/or comments by ECB officials fuel questions about whether or not there'll be another hike at the September meeting. To tell you the truth, as much as we would like to provide certainty of what will happen, the ECB itself will probably only know on the day of the next meeting what to do.

Macro developments over the summer have caused further complications for the ECB. While the rapid worsening of the economy should come as a surprise, at least judging from overly optimistic ECB growth forecasts so far, the speed with which headline inflation is coming down should still leave the central bank uncomfortable. Despite today’s drop, core inflation remains too high and wage growth up until now signals that even without excessive wage settlements core inflation could stay higher for longer.

We still expect headline inflation to come down significantly after the summer, mainly on the back of German headline inflation falling. We also expect the ECB’s September macro projections to bring downward revisions to both the short-term growth and longer-term inflation outlook. After a total of 425bp rate hikes in slightly more than a year, a pause in the ECB’s hiking cycle at the September meeting would make perfect sense. However, times at the ECB have changed.

Today’s minutes stress that the central bank is sticking to its stance of putting more emphasis on actual data rather than on expected data, that it still sees a higher risk of stopping tightening too early rather than going too far, and that it seems to have a higher tolerance for negative growth surprises than for unexpected inflation developments.

Also, for the hawks, the risk might be too high that a pause could actually transform into an actual full stop. This is why we think the hawks will have their final say and push the ECB for a final dovish hike at the September meeting. A last one for the road, even if it remains a very close call.