ECB Account: Hard Not to Read Between the Lines on Sep

The account of the last ECB meeting struck broadly the expected tone, framing the decision overall as a pause ahead of a reassessment in September. That meeting would “provide the next opportunity for a comprehensive assessment of the inflation outlook and surrounding risks, taking into account the evolution of the conflict in the Middle East”.

The discussion also showed a clear tightening bias, with some members signalling that they would have supported an immediate hike. Or, more precisely, “would not have opposed raising rates at the current meeting”. These members “stressed the low likelihood of a situation in which a further rate hike would not be warranted”. On this view, policy was not currently restrictive, while the balance of risks justified acting pre-emptively to head off second-round effects even though these had not yet emerged.

In its review of recent developments, the account identifies several notable threads. First, it highlights the upward pressure on crack spreads, which had reached new highs, alongside the upside risks from gas prices and low storage levels. The latest gas futures curve stood above the assumptions in the June baseline until the end of 2027, although the broader composite energy index remained close to the June baseline.

Weather conditions and El Niño were also identified as adding to the upside risks for food prices. As with the BoE, the ECB emphasises the particular importance of food prices because of their visibility to consumers and their influence on inflation perceptions, expectations and potentially wage demands.

In wider financial markets, the decoupling of US tech credit spreads was also highlighted in passing. This was attributed to the greater compensation demanded by investors following record bond issuance by hyperscalers and rising leverage risk.

On the economic data, the overall conclusion was that “recent incoming information suggested that the short-term outlook had improved slightly since the June projections”, although inventory accumulation intended to cushion supply disruptions was noted as an important caveat. Overall, “incoming information had been better than expected, and downside risks to growth were judged to have become less pronounced, as confidence indicators had continued to recover.”

On inflation, the latest large downside surprise, softer services inflation and moderating expectations for selling prices were all acknowledged. It is notable, however, how these developments were downplayed or given a more hawkish interpretation. For instance, the account notes that, in the ECB’s Corporate Telephone Survey, “a significant share of firms reported that they were reviewing and adjusting their prices more frequently, with some automatically passing through higher input costs via contractual clauses”. It concluded, a bit sweepingly, that the survey evidence “clearly indicated that indirect effects were materialising, possibly with some lags before inflation was affected”.

That same ‘reassuring for now, but possible upside risks after a lag’ spin was applied, maybe less convincingly, to the wage evidence. Wage pressures were contained and moderating, and the softening labour market “suggested a relatively low likelihood of second-round effects”. Nevertheless, members warned that wage responses could take time to emerge and that the present absence of second-round effects should not be taken for granted.

Overall, it is difficult not to read between the lines. “In September new projections would be available, as well as the estimate for GDP in the second quarter”, in addition to further evidence on inflation, wages and expectations. The subsequent upside surprise in revised GDP adds to that backdrop.

There is also an important passage distinguishing the June increase, which was presented as necessary across all the scenarios, from a further increase motivated more by “insurance”. Finally, the observation that “market participants also appeared to have a good understanding of the ECB’s reaction function” seems to hint at comfort with a market interpretation that, as the account itself notes, already almost fully prices a September hike into OIS.

Most explicitly, the account says that “another rate hike would likely be necessary unless the inflation outlook improved significantly”, while simultaneously stressing the usual line that the Governing Council was not pre-committed to a September move.

In short, although the account highlights the fluidity of developments in the Middle East and formally preserves optionality, the balance of the discussion seems clear. Barring a major event and outlook change by then, the ECB does appear inclined to validate market expectations for a September follow-up.