ECB Rates: Where next?

Where next for ECB rates?

Ahead of the September monetary policy meeting of the European Central Bank (ECB), the question was not so much whether they would adjust policy rates at this meeting (a 25bps cut to the deposit rate was fully priced in by the market), but whether there would be any guidance on expectations going forward. Given speculation over the rate path for other global markets, particularly in the US, the market was keen to hear whether any hints would be given regarding the possibility of a consecutive cut by the ECB. In the event, the ECB duly delivered its expected rate cut (the decision to cut by 25bps was unanimous) but gave no further guidance on what to expect in five weeks’ time when the ECB meet again in mid-October.

Data versus data point

A new set of (largely unchanged) staff forecasts for Euro area inflation and growth accompanied today’s decision, justifying the unchanged guidance. This was backed up by a re-assertion from President Lagarde that the ECB is wholly data dependent (not data point dependent) and will not pre-commit to a particular rate path - any decisions will be made on a meeting-by-meeting basis. Gauging by the market reaction (short-term European Government Bond yields rising by as much as 6bps), it seems that some were positioned for a more dovish message, hoping that a stronger signal would be given regarding future policy easing. Having arguably boxed themselves into a corner regarding the previous cut in June 2024 (which the contemporaneous incoming data arguably did not justify), our view was that any forward guidance from the ECB was very unlikely.

The only form of guidance that President Lagarde gave was that they expect the September inflation print to show a fall and inflation in the final quarter is likely to show a rise

The only form of guidance that President Lagarde gave was that they expect the September inflation print to show a fall and inflation in the final quarter is likely to show a rise, (due to the base effects of energy prices). She cautioned the market against reading too much into these specific datapoints - whether they will heed this warning remains to be seen.

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