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ECB Meeting Preview: Steady as She Goes

by CiCi
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Minimal New Data Since June Unlikely to Alter ECB’s Policy Stance

In the five weeks since the European Central Bank (ECB) last convened in June, a limited influx of new economic data has emerged. This data is unlikely to significantly alter the ECB’s economic outlook or policy stance (refer to our data monitor at the end of this report for more details). The outlook has slightly softened due to weaker-than-expected Purchasing Managers’ Index (PMI) and industrial production figures in the euro area. However, this moderation is likely counterbalanced by higher-than-expected core inflation rates, maintaining concerns about the pace of inflationary progress toward the target.

Given the ongoing economic growth, we anticipate the ECB will remain flexible, awaiting further data on inflation, wage growth, productivity, and profit trends before adjusting its communication or policy stance. This approach aligns with recent statements from ECB President Christine Lagarde and other officials. Consequently, the upcoming July meeting is expected to be a routine review with minimal market impact. Lagarde will likely address questions regarding the recent spread widening of French bonds and its relation to the ECB’s Transmission Protection Instrument (TPI). However, her responses are expected to echo Chief Economist Philip Lane’s recent comments, suggesting the spread widening has been orderly.

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Growth Data Introduce Downside Risks to ECB’s Projections

June’s PMIs showed an unexpected decline, with the composite index dropping to 50.8 from May’s 52.5, falling short of the expected 52.5. This decline likely represents a correction from the stronger-than-anticipated data in April and May. When considering the last quarter as an average, the composite PMI for Q2 2024 was significantly higher compared to Q1, indicating economic growth in Q2. Nevertheless, the decline in June’s industrial production and retail sales data raises questions about the robustness of this growth, suggesting potential downside risks to the ECB’s June staff projections of 0.4% quarter-on-quarter GDP growth in Q2 and the subsequent quarters.

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The persistent vulnerability in the growth outlook is the German manufacturing sector, which remains stabilised at low levels and continues to struggle with growth. This sector’s weakness was underscored by a 2.5% month-on-month decline in German industrial production in May, driven by a reduction in machinery and car production.

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