ECB to discuss interest rate reduction roadmap ahead of its summer break

Martin Wolburg, senior economist at Generali Investments, said he expects ECB president Christine Lagarde to take “a dovish wait-and-see stance” at the July meeting with other experts and brokers predicting one more rate cut this year that will likely happen when the regulator reconvenes in September. Pic: AP Photo/Michael Probst, file

Inflation has cooled significantly since highs recorded in 2022 and wage growth is set to ease across the eurozone, but some analysts forecast a cautious approach to interest rate reductions by the European Central Bank (ECB) at its July meeting.

The regulator is set to meet on Thursday, July 18, to discuss its interest rate reduction roadmap ahead of its summer break in August.

Martin Wolburg, senior economist at Generali Investments, said he expects ECB president Christine Lagarde to take “a dovish wait-and-see stance” at the July meeting with other experts and brokers predicting one more rate cut this year that will likely happen when the regulator reconvenes in September.

Meanwhile, companies across the eurozone are forecasting a more moderate increase in workers’ pay over the coming 12 months, a recent ECB survey found, which may ease some policymakers fears on moving too quickly in cutting rates.

The ECB’s Survey on the Access to Finance of Enterprises shows that companies are expecting salaries to rise by 3.3% over the next year — down from 3.8% three months ago.

Also, eurozone inflation declined to around 2.5% in June, down from 2.6% in May, but remains stubbornly above the ECB’s target of 2%.

In June, the ECB lowered its main lending rate by 0.25% but it stressed it will maintain a data-dependent and meeting-by-meeting approach and that there should be no pre-commitment to a particular rate path.

Policymakers also remain determined to ensure that inflation returned sustainably to the 2% target in a timely manner and affirmed that they would keep policy rates sufficiently restrictive for as long as necessary to achieve it.

The benchmark interest rate for the eurozone is currently 4.25% following the cut last month and this rate is expected to be reduced to 4% by the end of this quarter, according to Trading Economics global macro models and analysts expectations.

In the long term, the eurozone interest rates are projected to trend around 2.5% in 2025 and 2.25% in 2026, according to Trading Economics econometric models.

Interest rate reductions and hikes immediately impact tracker mortgage holders who have felt the brunt of a high interest rate environment over the last two years. There are 179,000 customers with tracker mortgages who owe around €15bn in the Republic.

Federal Reserve

Elsewhere, top US Federal Reserve officials touted interest rate cuts as getting "closer" after taking note of inflation's improved trajectory and a labour market now in better balance, remarks that appear to set the stage for a first reduction at the central bank's meeting in September.

Fed governor Christopher Waller and New York Fed President John Williams both voiced that description of the shortening horizon toward looser monetary policy, with Mr Waller using it in a speech delivered at the Kansas City Fed and Williams voicing it in a Wall Street Journal interview.

Their remarks were the latest in a rush this week of commentary from top Fed officials, including chair Jerome Powell, to note their increased confidence that the disinflationary trend that began last year is continuing.

- Additional reporting by Bloomberg and Reuters