While Christine Lagarde acknowledged last week that inflation remains undefeated, she did not address the prospects for the meeting on September 14, thus allowing her colleagues the opportunity to publicly debate the need to increase borrowing costs at a time when the board has never been so divided between the northern hawks and the southern central banks.

While the FED, through its President Jerome Powell, at the Jackson Hole conference, clearly and unambiguously signalled that US borrowing costs would remain high and could even rise further, the ECB president remained silent and vague.

For all observers, the Eurozone inflation figures on Thursday will be paramount. According to the Bloomberg consensus, the so-called core measure, excluding volatile items such as energy, is expected to have only slightly decreased to 5.3% this month from 5.5% in July. One of the main reasons is the greater resilience observed in services than in the struggling industrial sector.
In other words, core inflation remains relatively high without an evident downward trend.

As a result, hawks and doves are clashing in public. Nagel, president of the Bundesbank, insisted that there was “a long way to go” to restore price stability and that it was “far too early” to consider taking a break. On the other hand, Mario Centeno, the head of the Bank of Portugal and one of the ECB’s most accommodating officials, took a different tone, noting that “the downside risks we identified in June in our forecasts have materialized.”

The poor PMI results prompted investors to cut back their bets on a hike next month. Nevertheless, the general focus on inflation scepticism, manifested at Jackson Hole, was felt on Monday on Germany’s short-term debt. The yield on two-year bonds, among the most sensitive to monetary policy changes, rose by 3 basis points to 3.06%, almost erasing the drop that followed last week’s PMI data.

The reality is that, logically, the ECB should continue to raise its rates, as actual inflation is still far from the 2% target. But a divided board, a lack of long-term vision, and an institution more politicized than ever might choose to do nothing, pushing the Euro towards 1.05 against the dollar.