RPT-MNI SOURCES: ECB To Keep Meeting-By-Meeting Even After Cut

 (Repeats article first published earlier on Oct 10)

The European Central Bank will maintain its meeting-by-meeting approach and keep its options open for December even if it makes a widely-expected interest rate cut this month, Eurosystem sources told MNI.

“December's decision will be independent of anything we do in October,” one source said, with several officials arguing that a 25-basis-point cut at next week’s Governing Council meeting should not lead markets to expect a change in the ECB’s overall approach.

Lower-than-expected inflation, together with rising concerns over growth, have not only increased the chances of a cut in October but also triggered a debate on how the ECB should adjust its communication, an official from a national central bank told MNI.

“Whether cutting in October could be communicated as anticipating the December move, or whether we could wait for the projections to confirm a new cut in December, keeping optionality, or signalling a bigger change in tone,” the official said, referring to the discussion within the ECB. (See MNI SOURCES: Chances Of October ECB Cut At Least 50-50)

The ECB is now in a comfortable position, with markets accustomed to the meeting-by-meeting approach and gradualism it has maintained since June, another source noted.

“The language is unlikely to change significantly. It’s still serving us well, so direction remains obvious, no planned path, meeting-by-meeting etcetera,” said another official. “I'd say an October cut even underpins the meeting-by-meeting and data-dependent stance.”

DECEMBER CUT

Another cut in December already looks likely, the source said.

“I still think we cut in December. This isn't a 'borrowed' cut from December, but one seen as a reaction to a platform of data seen since September's policy meeting.”

Another official said their national central bank would probably prefer to wait until December before cutting but while it would not oppose an October rate reduction it would strongly argue in favour of maintaining the meeting-by-meeting approach.

Another agreed that December is likely to see another 25bp cut, as “growth will undoubtedly be revised lower again, and both headline and core inflation will be lower, even if only mechanically, on this month's data” in the next set of projections.

The official said he expected that September’s headline inflation would be the lowest in 2024 so far, before rising back to 2.1% or 2.2% in December. Core inflation is likely to continue edging lower, ending the year at around 2.3% or 2.4%, and falling below 2% by late Q1 2025.

“I expect both to be sustainably at 2% by mid-2025 at the latest,” he added.

Weak economic growth is becoming a significant concern for ECB policymakers, though they remain reluctant to acknowledge a major shift in the balance of risks, given the small deviation from projections and the absence of a full-blown recession scenario.

“I see flat growth for an extended period. We really do need to see the consumer back in play,” one source said, while another noted that the recovery is simply coming later than expected due to multiple factors.

Recent tensions in the Middle East are adding to the uncertainty, pushing for a more balanced view of the risks ahead, sources said.

An ECB spokesperson declined to comment.