FRANKFURT: The European Central Bank (ECB) is all but certain to keep interest rates unchanged while signalling that its next move is still set to be a cut, even if this guidance is likely to be vague and carry caveats.
The ECB lowered rates from record highs last month in a move that was widely expected but which some of its own policymakers considered to be rushed.
It is expected to be more cautious about a follow up move, as domestic inflation and wage growth remain stubbornly high.
In what is seen by many as a placeholder meeting, ECB president Christine Lagarde will attempt to strike a balance, arguing that price pressures are coming down as expected but risks remain, so that more data is needed before policymakers can pull the trigger again.
Since Lagarde has already telegraphed this message in the weeks leading up to the meeting, attention has already shifted to September, suggesting yesterday’s policy meeting may be the most uncomplicated since before the pandemic.
“We think the ECB is likely to communicate that they are still firmly of the view that inflation is coming down and that they are overall in a position to ease policy further,” Peter Schaffrik, a strategist at RBC Capital Markets, said.
Markets are pricing two rate cuts over the rest of the year and five moves by the end of next year, and no policymaker has challenged this view in recent weeks.
“We think the ECB is not uncomfortable with current market expectations of another 25 basis point cut being probable in September,” Santander CIB economist Antonio Villarroya said.
“Further out, our inflation projections are consistent with a pace of quarterly rate cuts, with the deposit rate reaching 2.5% by September 2025.”
The ECB’s key concern is that domestic prices, particularly for services, are moving sideways and relatively quick wage growth threatens to perpetuate inflation above the ECB’s target.
But multi-year wage deals already struck point to easing wage pressures later this year, suggesting that more benign numbers should come through eventually.
Economic growth also remains relatively weak, with a string of surveys pointing to anaemic activity, easing fears that buzzing summer activity, particularly in tourism, will further fuel price pressures. — Reuters
