ECB Governing Council member Peter Kazimir offered two distinct pathways for the central bank’s next move, strongly advocating for a 25 bps rate hike in the upcoming meeting next week.

Kazimir laid out the two scenarios: either to pause during the September meeting and opt for a “hopefully final” hike in October or December, or to proceed with a 25 basis point increase immediately, and “take a breather thereafter.”

“The second option seems preferable, reasonable, to me,” Kazimir emphatically stated. According to him, taking the latter route would be a “more straight forward and efficient solution,” providing the markets with clearer signals. Furthermore, it would allow policymakers additional time to confirm that inflation is moving towards the 2% target in a sustainable manner.

Kazimir’s recommendation comes at a time when there are increasing uncertainties surrounding the economic outlook. He acknowledged that “forecasts for inflation and economic growth are yet to be updated,” but insisted on taking pre-emptive action. “It is, therefore, necessary to take one more step. As they say, better to be safe than sorry,” he remarked.

ECB Governing Council member Francois Villeroy de Galhau refrained from detailing specific plans for the upcoming September 14 meeting. But he added, “I’m convinced we are close or very close to the high point of interest rates.”

Also, “In our fight against inflation, maintaining rates for a sufficiently long period now counts for more than further significant rises”, he said.

Villeroy also weighed in on inflation and economic growth trends, asserting that inflation passed its peak at the start of the year.” He added that recent fluctuations in oil prices “should not change the underlying dis-inflationary trend.” i

As for growth, Villeroy offered a measured outlook. “For the entire euro zone, we don’t see a recession today,” he noted. “The picture for France and the euro zone is slightly positive growth, slower growth,” Villeroy added.

ECB has just released its Consumer Expectations Survey for July 2023, offering an inside look into how consumers are viewing the economic outlook.

Most notably, median expectations for inflation over the next year remained static at 3.4%. Even more telling is that forecast for inflation three years out saw a marginal uptick, moving to 2.4% from 2.3% recorded.

On the other hand, mean economic growth expectations for the next 12 months turned a bit more pessimistic, registering at -0.7% as compared to -0.6% in June.

In terms of employment, expectations for unemployment rate a year from now remained stable at 11.0%. Consumers perceive the current unemployment rate to be 10.8%, suggesting an expectation of a broadly stable labor market.

Full ECB consumer expectations survey results here.

In an interview with The Currency, ECB Chief Economist Philip Lane offered some guarded optimism about the inflationary environment in Eurozone, despite acknowledging that the current inflation rate is a lofty 5.3%. Lane was keen to highlight a “welcome development” in the latest data, pointing to a slight easing in both goods and services inflation as potentially indicative of changing momentum.

Lane emphasized ECB’s ongoing challenge of steering inflation rate back to its 2% target. “What is a timely manner?” Lane posed, elaborating that the goal is to return to 2% “sufficiently quickly that everyone understands that the current inflation episode is time-limited.”

He underscored the importance of convincing the public that this is a “temporary inflation episode,” and that they should not alter their longer-term behavior in anticipation of persistently high inflation rates. The key objective here is to prevent inflation expectations from becoming unanchored.

Full interview of ECB Lane here.

In a speech today, ECB President Christine Lagarde emphasized two key reasons for the need of effective communications by central banks: “high inflation and high levels of attention on inflation.”

According to Lagarde, “While inflation is now falling, effective communication is likely to remain of paramount importance even after the current inflation spike is over,” she said.

Lagarde also highlighted the critical role that central banks play in anchoring inflation expectations. As various economic factors, such as relative price changes, come into play, it becomes even more important for central banks to maintain public confidence in their ability to ensure price stability.

The focus on inflation presents both an opportunity and a risk for central banks, Lagarde pointed out. On the one hand, the heightened public awareness around inflation could lead to unstable inflation expectations, posing a significant challenge for policy-makers. On the other hand, this increased attention gives central banks a valuable opportunity to communicate their commitment to price stability and to anchor public expectations.

Full speech of ECB Lagarde here.