ECB’s September rate meeting is ‘wide open’, president says
Lagarde notes that the decision will be determined by whether data confirms ongoing disinflationary process
EUROPEAN Central Bank (ECB) president Christine Lagarde said that the institution’s next interest rate meeting is “wide open” – hinting that another cut is possible as officials will have significantly more information on inflation by then.
“The question of September and what we do in September is wide open and will be determined on the basis of all the data that we will be receiving,” Lagarde said last Thursday (Jul 18).
This comes after the central bank kept its deposit rate at about 3.8 per cent.
She noted that officials have been scrutinising the three crucial elements underpinning the ECB’s inflation outlook – wage growth, corporate profit margins and productivity.
“If that data actually confirms the disinflationary process that is at work in the moment, it will reinforce our confidence in returning consumer-price growth to the 2 per cent goal in late 2025, as currently envisaged,” Lagarde said.
After last month’s landmark cut, the ECB is weighing whether eurozone inflation is cooling sufficiently to allow further such steps.
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There was a small dip in inflation in June to 2.5 per cent from 2.6 per cent. However, underlying pressures have held firm, and the advance in services costs again topped 4 per cent.
Policymakers have also been guarded about their plans.
But officials are increasingly wondering if they may only be able to lower rates once more this year, said people familiar with the matter, who asked not to be identified because deliberations are private.
Markets are leaning towards two more reductions this year, assigning about an 80 per cent probability to the first interest rate cut arriving in two months.
By then, officials will have fresh economic forecasts and two more inflation readings, as well as figures on wages, profits and productivity.
There may also be more clarity on the intentions of the Federal Reserve, with markets anticipating that US monetary easing will kick off the week after the ECB’s September meeting.
For now, the central bank said that consumer prices across Europe are behaving more or less as foreseen in its last round of quarterly projections in June.
“The incoming information broadly supports the governing council’s previous assessment of the medium-term inflation outlook,” it noted.
“At the same time, domestic price pressures are still high, services inflation is elevated and headline inflation is likely to remain above the target well into next year,” the ECB added.
Once again, the central bank said that it is not “pre-committing to a particular rate path”, while reiterating its “data-dependent and meeting-by-meeting approach”.
Lagarde noted that wage gains across Europe remain elevated but are receding, adding that productivity has only demonstrated “a little bit of progress” – trends which the central bank would not like to observe, the president said.
The ECB pointed out that “profits contracted in the first quarter, helping to offset the inflationary effects of higher unit labor costs” – a trend it sees continuing in the near term.
It attributed some of the persistent underlying price pressures last month to “one-off factors”.
While inflation is broadly in retreat, there are signs that a recovery in the eurozone’s 20-member economy is losing steam with rates still elevated.
Political turbulence in both France and around the world is not helping.
“The incoming information indicates that the eurozone economy grew in the second quarter, but likely at a slower pace than in the first,” Lagarde said.
“Looking ahead, we expect the recovery to be supported by consumption, driven by the strengthening of real incomes, resulting from low inflation and higher nominal wages.”
However, she warned that risks to growth are tilted to the downside.
The upshot for economists in a poll this month was a prediction of quarterly rate reductions – to coincide with policy meetings that include updated projections.
They see the cycle culminating in late 2025, with the deposit rate reaching 2.5 per cent.
Lagarde stressed that between now and September, the ECB will receive “a lot of information” – echoing language she used repeatedly in the run-up to June’s rate cut.
“That’s what we will be looking at to see whether or not it confirms the path that we are seeing,” she said. BLOOMBERG
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