MNI SOURCES: ECB To Hold In July, Signal Likely September Cut
ECB sources speak to MNI ahead of next week's meeting.
The European Central Bank is likely to hold rates at its July meeting, following its well-flagged 25-basis-point reduction on June 6, but it should signal a second cut of the easing cycle by as soon as September barring data surprises, Eurosystem officials told MNI.
It will be key for the ECB to observe how markets digest the June cut, but, while it will continue to stress a data-dependent, meeting-by-meeting approach, its June projections should indicate a continuing convergence of inflation towards target which it would expect to be confirmed by data leading up to its September decision, the sources said.
“To paraphrase Madame Lagarde from March, ‘we'll have more clarity in July, we'll have a lot more clarity in September’,” one national central bank official said, indicating that the ECB could take a similar approach in its June communications to that of March, when President Christine Lagarde first flagged the cut now expected for next week by saying “we will know a little more in April, but we will know a lot more in June.”
The ECB will have access to a “raft of information” between June and September, with much of that in the second half of the quarter, including not only economic data but also the results of deliberations at the ECB’s Sintra meeting and the Fed’s gathering in Jackson Hole, the official said, adding that while the central bank will stress caution, rate assumptions used for its projections will make it “pretty clear where we are going.”
PROJECTIONS
June’s projections, prepared by national central banks, look like coming in little changed from March’s, with rate path assumptions almost identical. While there are likely to be slight upgrades to growth and inflation to reflect the eurozone’s relatively strong first quarter, the mid-2025 landing zone for achieving the 2% target should remain, another official said.
The ECB will “continue to hold the restrictive policy line for now, even as we remove excess restriction,” the official said, “However, if data continues to come in line with our expectations, we'll obviously have greater confidence to follow the rate path that backs those projections.”
Rates markets currently price in 43 basis points in cuts by September, and about 60 by the end of the year, down from closer to 100 earlier in 2024 as persistent U.S. inflation has prompted investors to rethink the timing of easing by the Federal Reserve. A divergence with U.S. monetary policy is acknowledged as a risk by ECB officials, together with potentially greater challenges posed by geopolitical factors, but they insist that the eurozone economy will dictate the action of the Governing Council. (See MNI SOURCES: Fed, Geopolitics, Feed ECB Caution Over Cuts)
Some officials have told MNI that they have downgraded their expectations for easing this year to as little as 50 basis points, but one said three 25-basis-point cuts remains the most likely scenario.
“Is that forward guidance? No, because we do not announce it or commit to it. But it is consistent with our forecast,” the official said, adding that the June projections would serve as a “master” guide to the ECB’s policy actions.
“It would be unlikely for one month's inflation data to tip the balance to a cut or to staying on hold. The most important thing is that the projections are consistent with incoming data, and it seems that we are in that scenario,” the official said. “The projection has to be our guide -- otherwise, we risk overreacting to each new piece of information.”
Eurozone inflation edged higher in May, to 2.6%, above the expected 2.5%, while core rose to 2.9% from 2.7% in April.
But, while there will be bumps in the data, another source added, “we’re prepared to look through them if the overall path is intact.” (See MNI INTERVIEW: Fed Risks To ECB Easing-German Experts Chair)
CAUTION
Still, the ECB’s guidance is likely to remain cautious, another national central bank source stressed, adding that many Governing Council members wanted to avoid repeating what eventually became an unambiguous signal for June’s impending cut. There is only a small chance of a cut in July, the official added.
“It is not impossible for there to be surprises, but it is easier to get to September and decide again,” the source said.
While June is set to see the beginning of an easing cycle, the language of the accompanying statement is likely to be little changed from April, with a continuing commitment to a data-dependent and meeting-by-meeting approach to determining the appropriate level and duration of restriction, without any signal for a particular rate path.
“July will be the biggest meeting in terms of messaging on the rate path, particularly given the raft of data between June 6 and the mid-July meeting,” another official told MNI. “Maybe they will stress a little more that it is meeting by meeting, and not only ‘See you in September’!”
Still, the official noted, the meeting-by-meeting line has different interpretations, with some Governing Council members regarding rates changes as more appropriate at quarterly meetings when they coincide with the release of fresh projections.
An ECB spokesperson declined to comment.