John Fahey: A further reduction of 0.5% in interest rates over the rest of 2024 is plausible

The ECB kept interest rates unchanged at its last meeting. Picture: Hannelore Foerster/Bloomberg via Getty Images

In the past week we have seen the summer round of the key central bank meetings get underway, with the European Central Bank (ECB) first up.

As expected, its Governing Council kept interest rates unchanged. The ‘hold’ on rates in July follows the 25 basis point cut implemented in June to the ECB’s main interest rates. The rate cut in June represented the first change in six meetings, and followed on from the rate hiking cycle in 2022-23.

The statement from the latest meeting continued to note that the Governing Council will follow a “data-dependent and meeting-by-meeting approach” to determine the appropriate interest rate setting. It also re-emphasised that it is not “pre-committing to a particular rate path”.

Meanwhile, during the press conference, ECB president Christine Lagarde reiterated this approach. However, in response to a number of questions on the possibility of a rate cut at its next meeting on September 12, Lagarde did state that September “is wide open” and any decision will be determined by incoming data over the coming weeks.

She also commented that “it is clear between now and September, we will be receiving a lot of information”. In other words, the ECB is not ruling out a rate cut in September, while at the same time maintaining flexibility on the timing of any decision on rates.

Market rate expectations for the ECB have remained relatively stable over the last number of months. Broadly speaking, since the last ECB meeting in June, the market has been pricing in around 50 basis points of rate cuts between now and year end.

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In the aftermath of the July Governing Council meeting, the market is attaching a lower probability to the chance of a rate cut in September compared to before the meeting. It is now envisaging a 60% probability for a September rate cut versus 90% prior to last week’s meeting. A 25 basis point rate cut is fully priced-in by markets by the time of its October 17 meeting.

We believe that a further reduction of 0.5% in interest rates over the remainder of 2024 is a plausible scenario if underlying inflation, especially in relation to the services sector and wage growth, shows further signs of moderating.

 John Fahey is a senior economist at AIB