ECB review: Exceptional uncertainty, but still in a good place

• ECB decided to leave policy rates unchanged at today’s meeting as expected.
• Lagarde struck a positive tone in her economic assessment, although ECB still assess the balance of risk to growth as being tilted to the downside. Trade negotiations and data will likely determine whether to end the cutting cycle or not.
• We still pencil in a final 25bp cut at the September meeting, although risks are tilted towards a hold due to recent data improvement and positive trade news.

ECB decided as widely expected to leave policy rates unchanged at today’s meeting, and did not provide any significant news compared to the June meeting. Economic data has overall been aligned with expectations, while underlying inflation continues to soften with wage growth coming lower. Today’s statement noted that uncertainty remains ‘exceptionally’ high due to the US-EU trade dispute, making it unnecessary for the central bank to provide any new signals at this point. ECB still consider the risk for growth as tilted to the downside, but Lagarde repeated that monetary policy remains ‘in a good place’. Today’s decision to hold rates was unanimous according to President Lagarde.

Lagarde struck an optimistic tone in her economic assessment. Particularly, she highlighted that the growth surprise in the first quarter of the year was not only due to Irish front-loading of exports to the US but also domestic demand (consumption and investments) being higher than expected. Hence, growth has been developing a little better than expected. She said that the June baseline projections still hold, when asked about the trade rumors of a 15% tariff rate on the EU. We also highlight that today’s services PMI, which rose more than expected to 51.2, is another positive surprise. The weakening of the services sector seen in the past months has been a key argument for a cut in September by the ECB, but this improvement weakens that argument.

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