1-SEPT-2023

ECB MINUTES REVIEW: The account of the ECB's July meeting revealed that the decision to hike rates by 25bps was backed by all members in light of the inflation outlook, which was "basically unchanged since the June monetary policy meeting". Furthermore, emphasis was put on the merits of sticking to a data-dependent, meeting-by-meeting approach in an uncertain environment. In terms of the balance of views on the Governing Council, it was argued that interest rates had to cover more ground to bring inflation back to target, in particular if inflation did not decline as quickly as expected. Adding that, a "further rate hike in September would be necessary if there was no convincing evidence that the effect of the cumulative tightening was strong enough to bring underlying inflation down in a manner consistent with a timely return of headline inflation to the 2% target". Whether today's inflation release is enough to satisfy this criteria, remains to be seen. At the more dovish end of the spectrum, it was argued that it was quite probable that the September ECB staff projections would revise the inflation path sufficiently downwards towards 2%, without the need for another interest rate hike in September. That said, caution was also expressed about assigning too much importance to the September meeting and the projections; hence the Governing Council's data-dependent approach. On growth, members concurred with chief economist Lane that the near-term economic outlook for the euro area had deteriorated, owing largely to weaker domestic demand. Additionally, it was argued that the deterioration in the outlook showed that monetary transmission was working. subsequently, ECB-watcher Ducrozet of Pictet Asset Management highlighted the dilemma facing the ECB that: "There is convincing evidence that policy transmission is working. But it's not clear that it will be enough to get back to 2% as the next phase of the disinflation process is going to be more challenging." As it stands market pricing assigns just a 30% chance of a hike by the Bank next month, however, it will likely be a combination of commentary from ECB officials and source reporting that will cement calls over the announcement.