I have updated the ECB-ometer forecast for tomorrow’s meeting, last discussed here. Despite elevated inflation indicators, weakness in yesterday’s services PMI and last week’s consumer survey have contributed to a fall in the “average interest rate recommendation” from -2 bp to -6 bp. While insufficient to generate a forecast of a rate cut (recommendation of below -12.5 bp required), this suggests the ECB should now have an easing bias.

The ECB’s behaviour in 2001 may provide guidance on how the central bank will manage a shift from its current hawkish stance to an eventual rate cut. In January 2001 the policy statement in the ECB’s Monthly Bulletin talked of “upside risks to price stability which warrant close monitoring” – a similar formulation to that used in recent press conferences. The February Bulletin retained a reference to “close monitoring” and upside dangers but stated that “risks to price stability … appear more balanced”. In March “close monitoring” was replaced by an assurance that the Governing Council was “firmly committed to price stability”. This in turn was softened to “will continue to focus on maintaining price stability” in April, after which the repo rate was finally cut by 25 bp in May.

As now, inflation was a constraint on early action in 2001, with the annual increase in consumer prices hitting a high of 3.1% in May, the month of the first cut. The ECB-ometer’s forecasts also looked similar in early 2001 – see chart. One key difference was the euro, which had fallen significantly against other major currencies in 1999 and 2000.

If 2001 is a guide, the ECB may begin the shift towards easing by modifying tomorrow’s statement to indicate that risks to price stability remain on the upside but are diminishing because of slowing growth. This would be consistent with an eventual cut some time in the second quarter. A more dramatic shift in language is probably needed to signal the possibility of earlier action.