ECB Policy Meeting.
Conclusion: ECB will continue to cut rates by 25bp in each of the next two meetings.
"Monetary policy is becoming meaningfully less restrictive, as the interest rate cuts are making new borrowing less expensive for firms and households and loan growth is picking up. At the same time, a headwind to the easing of financing conditions comes from past interest rate hikes still transmitting to the stock of credit, and lending remains subdued overall."
The old language (Jan 6). was
"At the same time, financing conditions continue to be tight, also because monetary policy remains restrictive and past interest rate hikes are still transmitting to the stock of credit, with some maturing loans being rolled over at higher rates."
Mme Lagarde said this was a significant shift in the intepretation of future financial conditions but was not guidance on future path of interest rates. It was more about what could be "done unto the ECB" rather than what the ECB would do unto us. Mme Lagarde explained it rather poetically. She likened monetary conditions to standing at the cape of Good Hope (she had just been at the G20) with cold water from the Atlantic clashing with warm waters of the Indian Ocean. Sometimes the cold Atlantic current would dominate and sometimes the warm Indian water prevailed. So monetary poliicy is the observor on the beach (static) and sometimes her toes in the water would freeze and at other times be warm. So, said she, if the waters of the economy turned to cold (say the result of global trade disruption) where policy stands would be restrictive and if to warm it would not be restrictive. Whether it is hot or cold depends a lot on whether international devleopments wreck the global economy or not. I think they will.
What this tells me is that the shift in language on the stance of ECB monetary policy does not herald any pause in interest rate cuts.
The other things in the meeting were unsurprising to markets. The forecasts for economic growth were revised down (a revival of the consumer is still awaited and a normalisation of trade much prayed for). Inflation was revised up for this year (energy) but converges with the 2% goal in 2026. Service price inflation is falling at last. Wage growth increases are waning - even for services- and increases are being incresingly absorbed by lower profits rather than higher prices. Monetary transmission is working: bank lending rates falling but long borrowing rates are rising sharply along with bonds - given the increased bond issuance needed to fund defence, Draghi/Letta reforms and German infrastructure.
The most signifcant shift in the statement may well be the use of poetry to illustrate a central bank statement, like water gushing from an arid land.
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