By Miguel Jiménez González-Anlele, leading economist of the BBVA Research
In her press conference after the ECB meeting, President Lagarde of journalists and listeners wishing a “wait and see” holiday (Wait and See), an expression widely used by central bankers to imply that the following monetary policy movements will depend on the events. And it is that Lagarde used that expression quite a lot to communicate, implicitly, that the ECB is relatively comfortable with the current situation of interest rates (2% for the type of deposit) and that they will only make any more decrease if required by data or events.
With this message they also wanted to give a relatively less bassist tone than expected. Before the meeting, the markets discounted a drop of additional types of 25 points for the remainder of the year, given the pending risks linked to the US protectionist pressure and – vinculated to it – to the recent appreciation of the euro (and many other currencies) with respect to the dollar, which hardens European financial conditions, helps reduce inflationary pressures and allows lower types. In fact, the recent statements of Luis de Guindos in Sintra (euro to 1.20 as a reference point) and other ECB members suggested that the exchange rate issue would star in an important debate at this meeting. It doesn’t seem to have been like that. However, and perhaps for that reason, after the meeting the markets are not sure to discount that descent, and the euro was seen something else.
The main reason for optimism seems obvious: the good news of recent days on a potential tariff agreement with the United States, after Trump’s tactical threats to raise them to 30%. Lagarde did not make many references to the subject, but it is clear that it is the variable that has recently influenced the market and, if the agreement is confirmed, it would reduce uncertainty (although not quite, since a 15% tariff between advanced economies is not little, and its impact in growth and inflation may be greater than expected; and, who knows, can change again). The other factor that reflects this optimism is the positive reading of GDP growth data (they do not have to do “alone” with the advance of exports to the United States, according to Lagarde), and the little apparent concern because inflation goes well below the target. With this, a more stabilized situation in the commercial front, inflation about 2% and stable, and a eurozone growth that is not brilliant, but that is close to the potential of around 1%, would lead to that “wait and see” of the ECB.
There is much to be defined in the final phase of the year, despite the fact that the good recent news allows the ECB to be relatively quiet on vacation. First, it will be necessary to see if the United States trade agreements, not only with Europe but also with most commercial partners, close in “satisfactory” terms, with a cross -found that reflects that tariffs will be much higher than desired than desired. Second, what will be the tariff impact on the inflation and growth of the United States and in the rest of the world.
Once the effects of the advancement of exports have been dissipated to avoid tariffs that are taking place since the beginning of the year, the impacts on inflation will begin to be seen. Lagarde additionally remembered in the meeting that one of the inflationary risks (and that applies globally) is the possible disruption of value chains generated by the tariff pressure settings -and we have already learned from the pandemic that these disruptions can have large prices effects. And beyond the unknown on these effects, which will be cleared during the next quarters, there is also the long list of economic policy and geopolitics risks already known: fiscal policy in a context of high public debts, conflicts and wars with global impact and, more recently, pressures on the Fed so that it is less patient in its descents of types. All this will help define the arrival point of the ECB (currently the current 2% or 1.75%).
There is a lot of material to reflect during European holidays.
