BNP Paribas analysts assess recent European Central Bank (ECB) communication from Sintra, highlighting Christine Lagarde’s cautious stance and shift toward “framework guidance” in a volatile environment. Despite softer inflation data and easing energy prices, they still expect one more ECB rate increase in September, while noting that inflation risks have shifted slightly to the downside but not enough to change the policy path.

ECB weighs risks after energy shock

“We maintain our scenario of an additional ECB rate hike in September, despite the easing of inflation risks, which makes such a move less likely.”

“Faced with this uncertainty, the ECB president advocated for a communication style she referred to as “framework guidance”: an approach centred around scenarios and less prescriptive regarding the future rate paths compared to traditional “forward guidance”.”

“For her part, Christine Lagarde, participating in a panel discussion alongside Andrew Bailey (Bank of England), Kevin Warsh (U.S. Fed) and Tiff Macklem (Bank of Canada), defended the June rate hike as fully justified, while acknowledging that the risks to inflation and growth now appear more balanced (less upside risks to inflation, less downward risks to growth). “That does not mean the June hike was a mistake.”.”

“In summary, the overall balance of inflation risks now appears to lean slightly more towards the downside than it did a few weeks ago, but not enough to warrant a change in monetary policy direction.”

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