MNI INTERVIEW: ECB Set For 25bp Sept Cut Despite Volatility

MNI (BRUSSELS) - The European Central Bank still looks to be on course to cut rates by 25bp in September, but market expectations earlier this week for as many as 100 basis points in reductions by the end of this year look overblown, former ECB markets director Francesco Papadia told MNI.

“I don’t think they would do more than what was already expected, basically that they cut rates in September and then see,” he said, adding that this week’s blow out in market expectations for rate cuts by the end of the year looked excessive. Pricing has since retraced to about 72bp, still implying three 25bp cuts.

“Market expectations of 100bp by the year end look big to me,” Papadia added, also noting that 50bp cuts rather than the customary 25bp are “something for exceptional situations, and we are not in one of them”. 

The ECB Governing Council has only three policy meetings before end of 2024, in September, late October and December. (See MNI SOURCES: Even ECB Hawks Confident Inflation On Track)

PMI, SENTIMENT

Papadia told MNI that it would take a further deterioration in PMI indicators and or other "soft" sentiment indicators as well as further market volatility to prompt the ECB to consider more urgent action.

“If PMIs and confidence levels start going down significantly, further moves on the stock market could take a different meaning and act as an additional worry,” he added. 

Softer data on inflation and wages , should those emerge, might also exacerbate ECB concerns about a weakening economy and suggest further action on rates, he said.

Papadia is a senior fellow at the Brussels think tank Bruegel.