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The ECB’s key concern is that domestic prices, particularly for services, are moving sideways and relatively quick wage growth threatens to perpetuate inflation. | Photographer: Alex Kraus/Bloomberg
The European Central Bank is all but certain to keep interest rates unchanged on Thursday 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 even some policymakers considered rushed and the bank is likely to be more cautious about a follow up step, given stubbornly high domestic inflation and wage growth.
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 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 that Thursday’s policy meeting may be the most uncomplicated one since before the pandemic.
“Lagarde will leave more doors open by continuing to emphasise the data-dependent nature of the ECB, making it too early to give any firmer signals about future meetings,” Nordea economist Jan von Gerich said.
Markets are pricing in almost two rate cuts over the rest of the year and a little more than five moves by the end of next year, a view no policymaker has openly challenged in recent weeks.
“According to our central scenario, the next ECB rate cut will be delivered in September and will be followed by a long and gradual sequence of 25 basis points rates cuts per quarter in December, March, June, etc., i.e. the months when new macro projections will be presented,” UBS economist Reinhard Cluse said.
WEAK GROWTH, STUBBORN PRICES
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.
“The bigger elephant in the room is the sticky services prices,” Tomas Dvorak at Oxford Economics said.
“We remain a bit more sanguine about the outlook … (because) services inflation stickiness isn’t driven by strong demand but rather by lagging factors such as wages,” Dvorak added.
Multi-year wage deals already struck point to easing wage pressures later this year, suggesting that more benign numbers should come through eventually.
The economy also remains relatively weak, with a string of surveys pointing to anaemic growth, easing fears that buzzing summer activity, particularly in tourism, will further fuel price pressures.
But much of this is still just a hope and there have been few hard indicators coming through since the June 6 rate cut to confirm that projections are materialising into fact.
Some also argue that the ECB is downplaying risks to its central scenario, which puts inflation back at its 2% target by the end of 2025 even as rates continue to ease.
Another uncertainty is just how quickly the US Federal Reserve will cut interest rates.
While ECB policy is technically independent, it is difficult to be too far out of sync with the world’s biggest central bank.
Higher US rates would encourage investors to move their cash there, weakening the euro and boosting imported inflation.
Markets now see the Fed cutting in September, with a second move coming before the end of the year, a timeline that would also support two more ECB cuts.
(Only the headline and picture of this report may have been reworked by the Business Standard staff; the rest of the content is auto-generated from a syndicated feed.
First Published: Jul 18 2024 | 12:54 PM IST
