Natixis: ECB Meeting Review - FJElite

At yesterday’s meeting, the ECB Governing Council decided to keep unchanged its three interest rates by 25 basis points at 2.25%, 2.40% and 2.65% for the interest rates on the deposit facility, the main refinancing operations and the marginal lending facility respectively. The decision - widely expected - was unanimous.

During the press conference, President Lagarde stressed that some members wondered whether a rate hike today could not be appropriate, despite eventual unanimity. Looking forward, President Lagarde insisted that the key focus of the Governing Council is to avoid a materialisation of second-round effects. In this regard, she said that related indicators were too few at today’s meeting to raise the key interest rates. By contrast, she enumerated a long list of indicators that will be available for the next policy meeting in September.

The burden of proof to hike or not is on data. With this statement, President Lagarde recalled the 'framework guidance' adopted by the Governing Council to guide their decisions. Despite heightened uncertainty today due to the resurgence of tensions in the Middle East, President Lagarde downplayed the reasons for a rate hike as there is no sign of second-round effects at present.

Based on our (growth, inflation and commodities) forecasts, we do not see any risk of second-round effects anytime soon. We thus think that the ECB will keep its key interest rates unchanged in September. Our view is conditional to the outcome of the upcoming data by September. Should the short-term inflation expectations (in particular consumer, SPF, market-based and PMI prices) derail by then, the probability of a rate hike in September will substantially increase.