Key take aways from the ECB Governing Council meeting

The ECB Governing Council meeting did not make any policy changes – either to its key interest rates or to its balance sheet guidance – but there were some interesting takeaways, nonetheless.First, the ECB sounds gloomy on the economy. It noted that the ‘economy remains weak’ and that ‘the labour market is weakening’. Although it kept the view that there would be a recovery after ongoing weakness this year, it did concede that financial and monetary conditions had seen additional deterioration. It noted that ‘credit dynamics have weakened further’ and ‘longer-term interest rates have risen markedly’, the latter due to developments in ‘other major economies’. This sets the scene for further downgrades at the December forecast update. Second, it sounded more confident on recent inflation developments. The Governing Council pointed out that ‘most measures of underlying inflation continue to decline’ reflecting ‘improving supply conditions, the pass-through of previous declines in energy prices, and the impact of tighter monetary policy on demand and corporate pricing power’. In addition, ‘price pressures in tourism and travel appear to be moderating’. Third, the ECB not only did not announce any changes to the timetable for PEPP reinvestments (which would last until at least the end of 2024) or on the remuneration of excess reserves, but these subjects were not even discussed at the meeting. Although this might just reflect that this discussion may come later, we suspect that comments from hawkish officials in favour of such changes may not be broadly shared. One of the factors that may make the ECB cautious in making a change is the role of PEPP reinvestments as an anti-fragmentation tool. Meanwhile, President Christine Lagarde noted that the ECB’s decision making would not be driven by P&L considerations for the Eurosystem (which is exactly the reason that some officials want a higher proportion of excess reserves to be no longer remunerated). Fourth, Ms Lagarde confirmed that there would be no forward guidance forthcoming on how long the ECB would keep interest rates at these high levels for. Indeed, it would stick to a data-dependent approach in ‘determining the appropriate level and duration of restriction’. However, and predictably, she did emphasise that at the current time, discussion of rate cuts was ‘totally, totally premature’. Still, we judge that the ECB will likely pivot earlier than markets currently expect as growth and inflation data come in below expectations.