ECB may prime markets for rate cut in September
President of the ECB Christine Lagarde and the Governing Council will meet on Thursday this week to discuss monetary policy.
European Central Bank (ECB) officials may be about to prime investors for another interest-rate cut, though only after one of the Governing Council’s longest-ever summer breaks between decisions.
The ECB are set to meet on Thursday this week to discuss the path forward for interest rates but a cut has already been effectively ruled out as policymakers take time to assess the strength of lingering inflation pressures.
However, despite this traders are likely to watch closely for any clues offered by President Christine Lagarde on prospects for the next meeting, which is scheduled for September 12.
By then, the ECB will have seen two more monthly consumer-price readings, and have newly-compiled forecasts in hand as well. Several policymakers have stated a preference for acting at such quarterly occasions when fresh projections are available.
Officials may also have a clearer view by then of the Federal Reserve’s intentions. With fresh data showing US inflation broadly cooled to the slowest pace since 2021, speculation is mounting that policymakers in the US will also seek to cut rates in September.
New information that the Governing Council will see before its decision on Thursday includes a reading of industrial production in May which is forecast to show a second month of contraction, and a final measure of inflation for June.
Annual inflation across the eurozone has been slowing steadily. Recent estimates from Eurostat show inflation across the bloc is down to 2.5% in June down slightly below the 2.6% recorded in May. The ECB’s target for inflation is 2% per year.
Services inflation is seen now as the primary driver of inflation according to the figures.
Aside from questions on the path of borrowing costs, the ECB president may also be quizzed this week on France, which faces heightened scrutiny in financial markets amid concerns about its fiscal outlook after snap elections produced a hung parliament. That situation may also focus European finance ministers set to meet in Brussels on Monday.
The ECB is also facing the uncertainty surrounding November’s US presidential vote as analysts see the threat of another term for Donald Trump as the biggest danger to the region’s economy.
David Powell, a senior eurozone economist with Bloomberg Economics, said the ECB’s this week will be “closely watched by investors to fine-tune their expectations for the timing of the next rate reduction even though it’s almost certain to leave rates unchanged this month”.
“Ms Lagarde is likely to hint at another move in September, without being too committal,” Mr Powell added.
Ms Lagarde’s press conference could resonate more than usual, as colleagues heading to the beach during the summer fall largely silent at this time.
Similarly, any appearance by an ECB official at the Fed’s annual retreat in Jackson Hole, Wyoming, in late August, could draw extra attention.
This year’s eight-week gap between rate decisions is the longest summer pause for the Governing Council since the height of the pandemic in 2020. The ECB held monthly meetings for much of its history, before it introduced bigger breaks between gatherings starting in 2015.
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