ECB preview: rates to be cut but forward guidance disappears
This week’s ECB meeting is expected to see a cut in interest rates, though the stubbornness of inflation readings makes it hard to predict moves further into the future.
ECB poised for action as inflation nears target
With the latest inflation data from the eurozone, a rate cut at next week's European Central Bank (ECB) meeting has become almost inevitable. As current headline inflation approaches the 2% target and longer-term inflation forecasts remain stable around this level, the ECB has sufficient justification to further reduce the restrictiveness of its monetary policy.
New forecasts to shape decision-making
The ECB's upcoming macro forecasts will play a crucial role in determining the path of future monetary policy. While growth projections are likely to remain largely unchanged, inflation forecasts for 2025 and 2026 may see slight downward revisions. These adjustments could be attributed to lower oil prices and a stronger euro exchange rate.
June's projections as a baseline
In June, the ECB predicted the following economic outlook:
- Growth: 0.9% in 2024, 1.4% in 2025, and 1.6% in 2026
- Inflation: 2.5% in 2024, 2.2% in 2025, and 1.9% in 2026
Any significant deviations from these figures could influence the pace of future interest rate cuts. Downward revisions to growth or inflation would likely accelerate the easing cycle, while upward adjustments could embolden hawks to advocate for a more gradual approach.
Technical adjustments and rate cut expectations
As part of its operational framework review, the ECB announced a narrowing of the spread between the refinancing rate and the deposit rate from 50 basis points to 15 basis points, effective 18 September. While this adjustment could be interpreted as a form of monetary easing, it is unlikely to deter the ECB from implementing an outright cut to all three policy rates.
Data dependency to remain the guiding principle
Despite fading inflationary pressures, which provide the strongest argument for another rate cut, persistent high wage growth and elevated selling price expectations suggest that the battle against inflation is not yet conclusively won. This complex economic landscape will likely make future rate cut decisions beyond September more challenging and contentious than current market pricing suggests.
As a result, the ECB is expected to maintain its data-dependent approach without offering new forward guidance at the upcoming meeting. This strategy has proven effective in recent months, allowing the central bank to remain flexible and responsive to evolving economic conditions.
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