Economic Situation & strategy
September 18, 2023

ECB: All birds fly high

Article by Carsten Klude

Do you know the game "All birds fly high" from your childhood? All the players sit at a table and drum with their fingertips on the tabletop. When the game leader calls out "All birds fly high", all the players raise their hands in the air with their arms outstretched. Then the game leader calls out another animal, e.g. "All horses fly high! The players now have to think quickly whether the animal can fly. If it cannot, they must not put their hands in the air. If someone does put their hands up by mistake, they are eliminated from the game. A fun game in which you have to think and react as fast as lightning. Now, it is not known whether the vote on today's ECB interest rate decision also came about in this way and whether Ms Lagarde acted as the game leader. But we can imagine that there was an intense discussion between the "hawks" who voted for further monetary tightening and the "doves" who did not want to raise interest rates any further. In the end, the former kept the upper hand, so that when it came to the vote, either everyone or at least a large majority in the Governing Council voted in favour of a rate hike. Whether pigeon or hawk, both are birds after all.

The new growth and inflation projections of the ECB economists are likely to have been decisive for this decision. Above all, the increase in the inflation forecast for the coming year from the previous 3.0 to 3.2 percent is likely to have paved the way for an even more restrictive monetary policy. In this respect, we assume that this was the last interest rate step in this cycle. This is also how we interpret Ms Lagarde's statements at the press conference. At the next ECB meeting on 26 October, she should therefore rather shout "All penguins fly high" at the vote. Because even though penguins are birds, they cannot fly. Therefore, all hands should remain down.

The latest US inflation data for the month of August caused confusion: while the headline inflation rate rose from 3.2 to 3.7 percent, the core inflation rate, which excludes energy and food prices, fell from 4.7 to 4.3 percent. The different direction of the two rates is due to the development of energy prices. However, if one digs a little deeper into the price statistics, one certainly comes across findings that allow one to conclude that the degree of target achievement is significantly higher than it appears at first glance. US headline inflation excluding housing was 1.8 per cent in August, while the core inflation rate excluding "shelter", often referred to as "super-core inflation", was 2.3 per cent. It may be hard to believe, but these figures roughly correspond to the picture that emerges when US inflation is calculated on the basis of the harmonised consumer price index used here in the Eurozone, the HICP. This is because imputed rents, for example, play no role at all in this index. The overall inflation rate calculated by the US Bureau of Labor Statistics was 2.5 per cent in August, the core inflation rate was 1.9 per cent. We therefore assume that key interest rates will not be raised further in the coming week.