During the press conference, Christine Lagarde should reaffirm the need to maintain a prudent, flexible monetary policy based on continuous risk assessment.
After having lowered its key rates of 200 base points in just over a year, the European Central Bank (ECB) should, without surprise, opt for the monetary status at its July meeting, thus marking a break – temporary or not – in its softening cycle.
Our main anticipations
- Guiding rate: The Council of Governors should maintain the deposit rate – main reference rate – at 2.0 %, a level deemed neutral. The ECB should emphasize that this level remains appropriate with regard to the latest economic data, in a context of progressive reflux of inflation to its target.
- Communication: As an extension of the report of the last meeting, the ECB could initiate an adjustment of its strategy, moving away from strict dependence on data. The return to the inflation target of 2 % being now reached, the institution could adopt an approach more focused on prospective risk assessment. The decisions would continue to be made meeting by meeting, without preliminary commitment to the future rate trajectory.
- Economy: Although the risks weighing on growth remain downward, in particular due to global trade tensions and the uncertainties which result from it, Christine Lagarde should recall that several factors continue to support a gradual recovery in the medium term: a robust labor market, the increase in real wages, a relaxation of financing conditions as well as unprecedented budgetary support in Germany. In terms of inflation, it should emphasize that the risks are balanced, and that the scenario of a lasting anchor below the target seems unlikely. In addition, the president of the ECB should put the impact of the euro assessment into perspective, reaffirming that the ECB does not target the exchange rate.
In summary
The ECB should mark a break in July, while waiting for the quarterly update of its macroeconomic projections in September. During the press conference, Christine Lagarde should reaffirm the need to maintain a prudent, flexible monetary policy based on continuous risk assessment, while avoiding preclinizing an explicit orientation of rates. Overall, no major surprise is expected, and the impact on the markets should remain very limited.
