For the avoidance of doubt, the Introductory Statement says the Governing Council “therefore stands ready to adjust all of its instruments, as appropriate, to ensure that inflation moves towards its aim in a sustained manner”. At the moment, the monetary authorities are far from this aim, hence the numerous times Mario Draghi expressed his dissatisfaction about this situation.[ii]
Whether that will change any time soon will of course depend on how the economy develops. Based on the ECB President’s comments, one can argue that, on the one hand, the risk of a recession is considered to be low thanks to resilience in the labour market, the services sector and the construction sector. In addition, loans to non-financial corporations are growing at a robust pace and those to households see a gradual improvement. On the other hand, recent data point towards weakness of growth extending into the third quarter and the outlook is worsening further in the manufacturing sector. This may end up weighing on services as well. Moreover, risks remain tilted to the downside. Importantly, the pass-through of wage increases into final prices is taking longer than expected. As a consequence, eurozone core inflation remains stubbornly low, market-based indicators of inflation expectations have declined and the same has happened in the Survey of Professional Forecasters.
The inflation dynamics will also depend on the extent of policy easing and its effectiveness. On the latter, the ECB President sounded a word of caution: together with his colleagues, he believes monetary instruments are effective but there may be decreasing returns. However, this should not “exempt monetary policy from doing what is necessary or what we believe necessary based on the current information”. Easing on 12 September is a given now. The question is how and how much. We expect a 10 basis points cut in the deposit rate in combination with the introduction of tiered system for reserve remuneration.