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Jackson Hole: Some Clarity on ECB Hike?

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The main focus for the Jackson Hole Symposium is, of course, the Fed Chairman’s speech. But several ECB officials have travelled to the resort in the US Rocky Mountains, and have been giving interviews on policy in the EuroZone. For Euro traders, the focus could be after the US market close, when ECB President Christine Lagarde will also give a speech at the Symposium

There isn’t as much anticipation for Lagarde’s speech in part because Europe is not in the same situation as the US. While traders are on the lookout for when the Fed will “pivot” away from its hiking cycle, Europe is facing a different set of challenges. The economy only barely escaped falling into a recession earlier this year. Just this morning Germany confirmed its Q2 growth at 0%. Meanwhile, inflation is more than doubling the target rate. More importantly, the core rate has been stagnant or rising over the last three months.

No time to pivot

Since the Eurozone isn’t in a pivotal phase according to the data, there isn’t as much anticipation that Largarde will offer guidance of a policy change. The consensus is that she will most likely repeat the “inflation is too high for too long” line that has been seen by investors as an intention to keep hiking.

But there appears to be growing dissent among the ranks. Already several ECB officials have given interviews or made comments on the sidelines of the Jackson Hole event. The usual split between the “centre” and “periphery” has so far been maintained. Hawks such as Germany’s Joachim Nagel have suggested that more rate hikes were necessary. Doves such as Portugal’s Centeno have urged caution about raising rates further.

A chink in the armour?

The Euro was weaker in trading on Thursday after a surprising shift in comments from one of the more notable hawks. Croatia’s Boris Vujcic, who is known as one of the more hawkish members, said that core inflation has most likely peaked, leading some to interpret his comments as an implicit approval for not being as aggressive with rate hikes.

This came after a recent Reuters poll of economists showed that a slim majority now see the ECB pausing rates at the next meeting. There is still another round of inflation data to be released before the policy-setting members gather, which could surprise to the upside. But there appears to be a growing consensus that the ECB might be reaching a point where it won’t be hiking, at least for a while.

Will Lagarde announce the good news?

Lower inflation is generally seen as a good thing from the perspective of central bankers. The problem is that in Europe’s case, this is expected to be thanks to a stagnant economy. Although officials (including ECB’s Nagel) have expressed confidence the Euro Zone will avoid a “hard landing”, growth is still expected to not exceed 2% in the foreseeable future. Just like in the pre-pandemic era, lack of growth would presumably keep inflation pressures lower.

That means, however, the ECB likely won’t confidently announce that the rate hiking process is over. Officials won’t want to say they believe the economy will stagnate or contract in the coming months. Thus, markets might have to conform to comments from some of the hawks about inflation peaking, then wait for August data to see if there will be a pause in rate hikes at the September meeting.

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