Goldman Sachs: The ECB - FJElite
Lower energy prices have reduced headline inflation pressure since the June ECB meeting. But even the ECB staff’s milder scenario points to a persistent inflation overshoot, with core inflation peaking around 2.6% and staying above target through 2028. We therefore use three approaches—Taylor-rule analysis, historical ECB reactions to staff projection revisions, and a macro model—to assess the case for another hike. The evidence is mixed: some approaches imply a weak case for further tightening, while the macro model points to a stronger case for another 25bp increase. The upcoming data is therefore likely to be key. especially on core inflation. We believe that broadly in-line data will be sufficient to convince the Governing Council to hike in September despite lower energy prices, and this remains our baseline. But the hurdle for a hold is low if the data come in weaker and our...
Lower energy prices have reduced headline inflation pressure since the June ECB meeting.
But even the ECB staff’s milder scenario points to a persistent inflation overshoot, with core inflation peaking around 2.6% and staying above target through 2028.
We therefore use three approaches—Taylor-rule analysis, historical ECB reactions to staff projection revisions, and a macro model—to assess the case for another hike.
The evidence is mixed: some approaches imply a weak case for further tightening, while the macro model points to a stronger case for another 25bp increase.
The upcoming data is therefore likely to be key. especially on core inflation.
We believe that broadly in-line data will be sufficient to convince the Governing Council to hike in September despite lower energy prices, and this remains our baseline.
But the hurdle for a hold is low if the data come in weaker and our probability-weighted policy path remains below market pricing.