For ECB rate cutters, the music is as important as the words

THERE aren’t many sure things in life, but a second interest-rate cut from the European Central Bank (ECB) this Thursday (Sep 12) is one of them. A 25-basis-point reduction in its deposit rate to 3.5 per cent is fully priced in by traders, and a plethora of Governing Council members have called for it. That’s why we’re focused here on what comes next, for the war on inflation is won and policymakers now have an unpleasant-looking economic downturn to combat.

It’s impressive the ECB will have cut twice ahead of the US Federal Reserve, a point that won’t be left unmentioned on Thursday in Frankfurt, I’m sure. But the ECB has so much hard work ahead if the euro area is to avoid another grim downturn. This meeting is a quarterly review with updated forecasts, featuring downward revisions on growth and inflation likely as both are notably higher than economists’ survey averages. It helps that the ECB’s negotiated wage-growth tracker has decelerated to 3.6 per cent annually in the second quarter from 4.7 per cent in the first.

The most important signal the Governing Council could send is roughly how much it expects to cut rates in the months ahead. All that takes is an explicit acceptance of what the market is already pricing in – rather than the usual series of pushbacks and handwringing. The specific timing, and how much it eases this year, are of secondary importance for the real economy. Predictability on financing costs for investment planning is the holy grail for corporates.