The European Central Bank (ECB) maintained interest rates unchanged on Thursday, indicating that September’s meeting was “wide open.”
This decision comes amidst a downgraded economic outlook for the eurozone and forecasts of continued falling inflation.
Last month, the ECB cut rates from record highs in what some policymakers deemed a rushed decision due to stagnating disinflation.
Now, the bank is adopting a more cautious approach for future steps.
Hints of a potential rate cut in September emerged, notably from ECB President Christine Lagarde’s statement that growth risks were “tilted to the downside,” a shift from her previous stance of balanced risks in the near term.
“We would conclude that a September cut remains firmly on the agenda,” said JPMorgan economist Greg Fuzesi.
Lagarde noted that growth likely slowed in the second quarter and that weak industrial output and investment activity suggest muted expansion ahead.
This outlook supports the expectation that subdued activity will continue to reduce price pressures, potentially allowing for further rate cuts, possibly once a quarter.
However, to avoid the pitfalls of overly specific guidance, Lagarde emphasized that future rate decisions would be data-driven.
“The question of September and what we do in September is wide open,” she stated, refraining from repeating her June comment about a “strong likelihood” of easing monetary policy.
Her remarks on wages also hinted at potential policy easing. While wage growth remains high, Lagarde pointed to a forecasted slowdown, with income growth aligning with the ECB’s inflation target next year. “We read all this as another sign that the ECB retains a dovish bias as it eyes a soft landing,” said TS Lombard economist Davide Oneglia.
“Leading indicators remain consistent with more service disinflation in the second half, warranting at least another couple of cuts to avoid real rates from becoming progressively tighter.”
The euro dipped slightly after the decision, which had been anticipated by policymakers. Markets are pricing in nearly two ECB rate cuts for the rest of the year and over five by the end of next year. Policymakers have not challenged this view openly in weeks.
The September meeting, set amidst a plethora of incoming economic data, will be crucial. Quarterly growth, wages, and productivity figures, along with two more monthly inflation readings, are due before the meeting.
This data will influence policymakers’ views, likely solidifying their stance by late August.
“As long as the inflation data is roughly pointing in the intended direction, the dovish-dominated ECB Governing Council is likely to cut its policy rates further at its next meeting in September,” said Commerzbank economist Joerg Kraemer.
“Further interest rate cuts should follow in December and March next year.”
The ECB’s main concern remains that domestic prices, especially for services, are stagnant, while rapid wage growth threatens to sustain inflation above the target.
Despite weak economic growth, surveys suggest that robust summer activity, particularly in tourism, may not significantly drive up prices.
However, confirmation of these projections remains pending since the June rate cut.
Some argue that the ECB may be underestimating risks to its central scenario, which aims to return inflation to its 2% target by the end of 2025, even as rates continue to ease.