MNI SOURCES: September Rate Cut In Sight For ECB

The European Central Bank remains on course for a September rate cut, barring data surprises, Eurosystem sources told MNI, playing down the immediate significance of higher inflation projections and emphasising that prices are still seen settling around the current price target of 2% by the second half of 2025.

Upward inflation revisions in June’s projection round do not much shift the outlook from March, with the overall trend more important than whether the target is hit one quarter sooner or later, sources said, speaking after the ECB reduced its deposit rate by 25 basis points to 3.75% on Thursday, its first cut since 2019.

There is “still a deep consensus” in the Governing Council that more cuts are coming this year, but “there was no real need to box ourselves in” by immediately signalling another cut, another Eurosystem source said, pointing to the ECB’s current data-dependent and meeting-by-meeting approach. (See MNI SOURCES: ECB To Hold In July, Signal Likely September Cut)

CONFIRMATION

Confirmation that the disinflationary trend remains intact, “irrespective of the monthly bumps” will be the baseline for future rate cuts, a source from a national central bank told MNI, noting that the Governing Council still wants to see data confirming the validity of its projections.

"Don't get bogged down in the headline [projection] numbers. Inflation is still projected to be back at target in H2 2025", one source said.

September’s projections , which will be compiled by the ECB’s Frankfurt-based staff, could well be lower than those for June, which were prepared by economists at national central banks within the Eurosystem, another source said.

“Eurosystem projection rounds tend to err a notch higher than ECB staff projections, so let’s not get carried away,” he added.

FAITH IN PROJECTIONS

A renewed confidence in the projections is convincing many policymakers that lower rates ahead will be appropriate, with some seeing a return fairly soon to more normal policy settings, in which there is again a greater prominence for the ECB’s projections as a communications tool.

“With the greater degree of confidence in our overall projections, there is no reason not to believe the assumptions behind them -- including the implied rate path -- are correct,” a source said.

Another official stressed that the Governing Council will want the narrative of a continuing disinflationary trend to be broadly supported by a range of data.

“My sense is that decisions will be based on assurances that the trend is directionally good, irrespective of the monthly bumps. So fretting about the precise timing of the next rate decision based on one or two data points is likely to be a fruitless business,” the source said.

An ECB spokesperson declined to comment.