00:00My base case is still for the ECB to hold this year, but I think markets are right to sense this sort of about turn in the ECB's guidance.
00:10So late last year, we had policymakers suggesting, well, if markets are expecting the next move to be up, perhaps in 2026, that sounds about right.
00:18But then more recently, there's been some concerns about some disinflation coming through as a result of the strong euro.
00:24And I just would just keep in mind here, the eurozone is still a very industry-heavy, export-oriented economy.
00:31You see the weakness still in Germany. We've had a long period of deindustrialization.
00:36And so I think if the ECB can start to form an argument that inflation may undershoot, exports are going to be weak, the euro strength is a problem.
00:45I think they might just be gently signaling to markets that if this story unfolds the way I just mentioned, they should be ready perhaps for a rate cut.
00:55Well, yeah, when does the ECB undershooting its inflation target become a problem?
01:00How much does the euro need to appreciate for it to change the ECB's rate path?
01:06Well, in my view, markets will sort of do most of the job.
01:10Policy is probably neutral to slightly easy in the eurozone.
01:14There are no significant inflation concerns on the horizon.
01:18So bond markets will just adjust to changing inflation expectations.
01:22That on its own helps with easing financial conditions.
01:27The other thing just to keep in mind here is that if you get strong demand for eurozone exports as part of a global upswing this year,
01:34which I think is probably base case for me,
01:37I don't see why euro strength on the back of demand for eurozone exports should be a problem for the ECB.
01:44Put this a different way.
01:45If European consumers suddenly have rising purchasing power and European businesses see increased demand for their wares,
01:53why should the ECB try to stimulate against that?
01:56And I think this is going to be the internal logic.
01:58The point you make about how far does the ECB need to undershoot,
02:01I think if markets start to see inflation expectations, say, fall below 1.5%,
02:06I think then the ECB will be prepared to move.
02:09But I think close to 2% or slightly below, which is probably where we're going to be,
02:13I think that's going to be enough to keep the ECB on hold.
Comments