Christine Lagarde’s avoidance of a clear signal of intent for European Central Bank policy has just thrown a brighter spotlight on a pivotal week in the euro zone.
While the president observed on Friday that inflation remains undefeated, she didn’t address prospects for the Sept. 14 meeting, giving colleagues scope to publicly debate the need for increasing borrowing costs just as crucial data arrive in coming days.
Consumer-price numbers will set the scene for one of the most suspenseful decisions since ECB rate hikes began more than a year ago, as officials ask if additional monetary tightening is an imperative, or whether a souring economic outlook is bleak enough to warrant a pause.
Those who attended the Federal Reserve’s Jackson Hole conference alongside Lagarde will have heard for themselves Chair Jerome Powell’s own signal that US borrowing costs will stay high and could even rise further.
“Our view remains that a rate hike in September remains on a knife-edge — but ultimately the ECB, with an eye on core inflation, will raise,” David Powell and Maeva Cousin of Bloomberg Economics wrote after the president’s speech.
Read More: ECB REACT: Lagarde Retains Hawkish Tone, Hike Likely Next Month
By contrast, in another illustration of the close-run nature of the decision, economists at Berenberg led by Holger Schmieding changed their forecast on Friday before Lagarde spoke to put a 60% probability on a rate pause, up from 40%.
For all observers, euro-area inflation numbers on Thursday will be primordial. The so-called core measure striping out volatile elements such as energy is anticipated to have dipped only slightly to 5.3% this month from 5.5% in July, according to a Bloomberg survey of economists.
A key reason is the greater resilience seen in services than in the struggling industry sector.
“Core inflation is still quite elevated, without a very clear downward trend,” Governing Council member Martins Kazaks of Latvia told Bloomberg TV on Friday. “I would still err on the side of raising the rates.”
His hawkish colleague Joachim Nagel, president of the Bundesbank, insisted that there’s “some way to go” in restoring price stability and it’s “much too early” to think about a pause.
By contrast, Mario Centeno, the head of Portugal’s central bank and one of the more dovish ECB officials, struck a different tone, observing that “downside risks that we identified in June in our forecast have materialized.”
They spoke in the shadows of the Teton mountain range after a series of dire purchasing manager reports released last week that signaled the contraction of private-sector activity in the euro area had intensified, raising the prospect of downward pressure on inflation.
“Most ECB speakers have emphasized that they are data dependent,” Schmieding of Berenberg said in an email on Sunday. “If data on the real economy point down and August inflation does not spring an upside surprise, the ECB seems slightly more likely to stay put in September.”
The poor PMI readings prompted traders to reduce bets on a hike next month. Money markets still see ECB policymakers delivering a final move by year-end, but reduced the chance of such an outcome to around 80% from fully pricing it earlier this month.
Even so, the overall emphasis of wariness on inflation shown at Jackson Hole was felt in Germany’s short-end debt on Monday. The yield on two-year bonds — among the most sensitive to changes in monetary policy — rose 3 basis points to 3.06%, almost erasing the decline which followed last week’s PMI data.
Aside from the inflation data, along with the release of numbers from the region’s biggest economies, public comments by officials may also draw attention from investors after weeks of silence during their summer break.
Nagel and his hawkish Austrian colleague, Robert Holzmann, are scheduled to speak on Monday, while Tuomas Valimaki, the Finnish official attending Governing Council meetings, will deliver remarks the following day.
Comments from ECB Executive Board members Isabel Schnabel and Luis de Guindos are due on Thursday. A release of minutes of the July meeting the same day may also give hints about officials’ thinking on their next decision, which will feature new quarterly economic forecasts.
Lagarde and her colleagues have stated that those projections will be a major element in their upcoming judgment on whether or not to raise rates further.
Her speech in Jackson Hole looked at longer-term structural shifts, including changes in the labor market, the energy transition and geopolitical fractures, that mean reading the economy has become more challenging.
“There is no pre-existing playbook for the situation we are facing today,” she said. “Our task is to draw up a new one.”
While Bloomberg Economics’s Powell and Cousin said Lagarde’s stress on inflation ratifies their view for a rate hike next month, others weren’t so sure.
“It was a good speech,” said Erik Nielsen, group chief economics advisor at UniCredit. “But it was obviously studiously constructed to provide no new guidance at all.”
--With assistance from Michael McKee, Catarina Saraiva, James Hirai, Edward Bolingbroke and Carter Johnson.
(Updates with bunds in 15th paragraph)