MNI SOURCES: ECB To Avoid Clear Rate Path, Sept Cut Baked In

MNI (LONDON) - The European Central Bank is happy with market rates pricing, and likely to retain its meeting-by-meeting approach to policy rather than spelling out a more explicit easing path after cutting the deposit rate by 25 basis points to 3.5% later this week, Eurosystem sources told MNI.

The ECB remains on course for 25-basis-point cuts coinciding with new projections once a quarter as it calibrates concerns over a slowing economy and Fed easing with persistent services inflation, sources said. 

“Markets are pricing in the future path of rates quite well. We might as well leave the official statement without any firm commitments and remain data-dependent,” one said, though noting that a September cut was in the bag.

“You can write the headlines now on the rate change. Will it be unanimous? Possibly not, but certainly a very large majority - or near unanimity in the President's terminology,” the source said.

September’s meeting will also see the ECB move to implement the outcome of its Operational Framework Review, with both its Minimum Refinancing Operation and Marginal Lending Facility rates recalibrated to a permanently fixed spread over the Deposit Facility. But the move will only emphasise the role of the deposit rate as the main monetary policy tool. (See MNI: ECB Rate Shift Gives Added Focus To Deposit Facility Rate)

OCTOBER DECISION

While some officials now view a further deposit rate cut in October as more likely than before the July meeting, others have not ruled out a “hawkish cut in September” accompanied by a strong message of vigilance regarding services.

“It would be absurd to completely close the door to an October cut, but it wouldn’t be wise to leave it wide open either, even if a cut is possible,” said one source, adding that there was no urgency to decide on October unless incoming data indicated economic deterioration.

“I think the markets have become very used to our quarterly cuts as moments in which we have more clarity,” the source said.

Another source noted that hawks would resist an October cut and that a slowdown in growth was a necessary accompaniment to lower inflation.

 “We need to see something we don’t see yet,” to justify a cut in October, the source said.

GROWTH PROJECTIONS

June’s macroeconomic projections upgraded this year’s growth to 0.9%, but slightly downgraded the estimate for 2025, to 1.4%. ECB President Christine Lagarde said that risks to growth were tilted to the downside, pointing to factors including global demand, trade tensions and war, as well as the possibility that past monetary tightening could have a greater effect than anticipated.

Another source added that growth was definitely a concern.

“If growth falls too far too fast it becomes deflationary and necessitates further cuts. That’s not the case right now, but it’s a tricky balance,” the source said.

ECB officials still see the terminal rate for this cycle as distant, though discussions about it are likely to begin towards the end of 2024. (See MNI SOURCES: ECB Neutral Debate Heats Up As Growth Weak)

Still, there is consensus that cuts will continue well into 2025. One official predicted rates would settle “somewhere around 2% to 2.5%, though stressing that “as always, I won’t get too hung up on the final move in a cycle, especially not this far from the end-point.”

While the risk of a prolonged and severe downturn remains low, one official noted that a longer period of stagnation or very weak economic growth could be on the horizon.

“We are beginning to see signs that confirm a slowdown that, if continued or intensified, could be problematic and could lead to faster action. But we have to stay calm because it could stay there,” one source said. “In any case, as far as monetary policy is concerned, we cannot react thinking about the short term.”

BRIEF INFLATION SPIKE

Despite a small inflation spike expected in late 2024, inflation is projected to decline through 2025 and reach the 2% target “sustainably” by mid-year, one source said.

While services sector price rises remain a concern, worries over wage growth are starting to diminish.

The source added that the uptick in services prices in August may have been linked to the Paris Olympics and should fade.

Another source highlighted that the slow decline in core inflation warrants continued caution. And, while euro appreciation and falling oil prices could provide some relief to the ECB, rising gas prices remain a potential concern.

An ECB spokesperson declined to comment.