Economic Research View
Europe: Review on July ECB’s Governing Council
Nomura Asset Management Co., Ltd. Published July 28, 2023

Atsushi Matsumoto, CFA
Senior Economist
While the ECB has decided upon an additional rate hike, the policy statement and President Christine
Lagarde’s comments stressed that the ECB’s stance has taken a data-dependent approach. Weakereconomic data and disinflation seem to be behind this, and if the data moves broadly in line with recent
trends, the ECB’s outlook will be downwardly revised, warranting a pause, at least, at the September
meeting.

The ECB decided a rate hike of 25bp, but refrained from clear messages for future decisions,stressing a stance of data-dependence■

The Governing Council in July unanimously decided to raise the policy rates by 25bp as widely expected.
As for future decisions, there were big changes in the policy statement and President Christine Lagarde’scomments, both of which I think strengthened the data-dependent approach of the ECB.

■

A sentence regarding future decisions in the policy statement was changed to “ensure that the key ECB
interest rates will be set at sufficiently restrictive levels” from “ensure that the key ECB interest rates will
be brought to (such) levels”, and Lagarde said that this change was “not random or irrelevant”. The
expression in June had implied that the monetary policy was not restrictive enough (that’s why thecommunication then was “the policy rates will be brought to” restrictive levels), while the one in Julysignaled that the policy could be restrictive already.

■And, while Lagarde had stressed “we have ground to cover” in June, this month, in response to aquestion asking if the ECB had more ground to cover, she said “At this point in time, I wouldn’t say so…”,adding “the data… will tell us whether or how much we have ground to cover…”. This suggested a
possible pause at the next meeting in September. Indeed, she said “we might hike and we might hold”.
In addition, she mentioned that if the next decision is holding, “…it would not necessarily be for an
extended period of time…”, suggesting that the Fed’s type of pausing (skipping one meeting) would
possibly be considered.

■All in all, the communications above have meant that the ECB’s stance has shifted to a data-dependent
approach from what could previously be interpreted as a partial data-dependence (recall that, until June,the ECB had pre-committed an additional hike while stressing a data-dependent approach).

Weaker economic momentum and disinflation seem to be behind the changes in the ECB’s stance.
The ECB’s outlook for the GDP and inflation could be downwardly revised, and if that happens, apause at the September meeting will be possible■

What made the ECB's communications change so much? Changes in the ECB's assessment for theeconomy and inflation implied that the ECB is now less concerned about upside risks for the outlookof the economy and inflation. Rather, the ECB seems to be aware of downside risks.

■As for the economy, Lagarde explained "the near-term economic outlook for the euro area has
deteriorated, owing largely to weaker domestic demand” and “The economy is expected to remain
weak in the short run", which I think was partly due to weaker PMI in July. The ECB's assessment forthis weakness was very important: she linked the weakness to tighter financial conditions by saying"financial conditions… are increasingly dampening demand". I think that the latest Bank Lending
Survey had supported this assessment because the Survey had shown that higher interest rates had
dampened demands for bank loans (Fig1).

Figure. 1 Factors to affect demandes for bank loans

Note: Nomura Asset Management based on ECB data.

■And regarding the inflation, the policy statement said “The developments since the last meeting support
the expectation that inflation will drop further…”, signaling some optimism for the continuity ofdisinflation.

■I think that these communications implied that a possibility of downward revisions of the GDP andinflation outlook in September would be increasing (albeit marginally). Certainly, we have to continue
checking all the economic data we have until the next meeting. But, as long as the data moves broadly2

in line with recent trends, the GDP and inflation outlook will be downwardly revised, which will warranta pause, at least, at the September meeting.

*This commentary is based on personal views of the author and does not necessarily represent Nomura AssetManagement house view.

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