MNI ECB WATCH: ECB To Cut 25BP, Stick To Data-Dependency

MNI (ROME) - The European Central Bank is set to cut its deposit rate by 25 basis points to 3.5% on Thursday, but is expected to avoid explicit pre-commitments regarding future policy moves in its two remaining meetings of 2024, despite issuing projections that are likely to align with ongoing disinflation.

September’s projections will be produced by ECB headquarters, which some analysis has indicated produces a slightly lower skew to inflation than those quarterly exercises involving more input from the Eurosystem’s national central banks. Still, expectations are for little change, and for inflation to be around the 2% target in 2025 and 2026.

In the press conference, ECB President Christine Lagarde will have to strike a balance between communicating a more dovish outlook while maintaining a meeting-by-meeting approach to rates setting, despite improving inflation trends and rising concerns over economic growth, and as the Federal Reserve has turned more dovish. Rates futures have shown a slight acceleration of easing expectations over recent months, with 63 basis points of cuts now priced in for the remainder of this year. (See MNI SOURCES: ECB To Avoid Clear Rate Path, Sept Cut Baked In)

Despite encouraging headline inflation data in recent months, ECB officials expect further bumps in inflation later this year before it resumes its decline through 2025, eventually reaching the 2% target by mid-2025.

Still, concerns over rising services prices remain elevated after the spike in August, though worries over the labour market and wage data are beginning to ease. Energy prices have subsided, though officials recognise that gas prices could spike again due to geopolitical risks.

Lagarde could face questions regarding the neutral or terminal rates. While the end of the easing cycle remains some way off, it is anticipated that discussions around this will grow in importance in the coming months, and the ECB may find it increasingly difficult to avoid addressing the issue publicly.

The ECB will also implement some changes from the Operational Framework Review at the September meeting, recalibrating both the Minimum Refinancing Operation and Marginal Lending Facility rates to a permanently fixed spread above the Deposit Facility rate. The move will reinforce the deposit rate's role as the central bank’s main monetary policy tool. (See MNI: ECB Rate Shift Gives Added Focus To Deposit Facility Rate )