Following the June rate cut, the ECB is expected to keep rates on hold, pending September economic projections. Divisions are growing between ‘hawks’ and ‘doves’ members, while analysts expect two more cuts by the end of the year.
Following the rate cut in June, the European Central Bank (ECB) is expected to maintain interest rates and the unchanged orientation at the meeting on July 18, as expected by market participants.
Several factors support the ECB’s decision to keep rates stable in July. policy makers They stress that the June cut does not imply a linear reduction in interest rates. In addition, there has been no significant data since June and, in general, members prefer to wait for the new macroeconomic projections September quarterly.
The latest inflation report showed a slight decline in the annual headline inflation rate, from 2.6% in May to 2.5% in June. However, underlying inflationwhich excludes energy and food, remained stable at 2.9%. Services inflation also remained high, at 4.1% year-on-year, indicating no signs of easing so far this year. market participants come almost sure another rise in Septemberand interest rate futures show an implied probability of 80%.
Diverging opinions among ECB members
The eurozone is “well advanced” on the path to disinflation, ECB President Christine Lagarde said at the ECB Annual Forum about central bankheld in Sintra earlier this month.
“We are in that slow recovery that occurred in the first quarter and we hope it will continue, but all of this is loaded with uncertainty and large questions about the future“, he added.
The recent ECB communications have highlighted a division among the members of the Governing Council. Some, such as the Governor of the Central Bank of Ireland, Makhlouf, and the Governor of the National Bank of Slovakia, Kažimír, are in favor of a cutOthers, such as Bank of Greece Governor Stournaras, Bank of Portugal Governor Simkus and Bank of Finland Governor Rehn, are calling for two cuts.
The Governor of the Bank of Portugal, Mario Centeno, one of The most moderate members of the ECBsaid it is possible to cut rates at each meeting. Hawkish members have warned against too rapid relaxation interest rates, arguing the need to balance the upward risks of inflation.
Among the hard-line hawks, Austrian central bank governor Holzmann said this month: “My impression is that act too soon creates greater risks than acting too late,” adding that he believes the persistence of inflation is underestimated. Martins Kazaks of the Central Bank of Latvia stressed the importance of a data-driven approach and suggested there was no rush to cut interest rates.
Analysts expect two more rate cuts by the end of the year
There is a general consensus among analysts that the ECB will choose to cut interest rates twice more this year, in September and December. “We do not believe that Thursday’s press conference will be a good sign of the future.” provide more clarity “on the ECB’s outlook,” said Carsten Brzeski, global head of macroeconomics at ING Group. He added that the main focus will be have a smooth start to the season on vacation and avoid sending markets down a rocky summer road.
A first cut by the Federal Reserve in September ahead of the ECB meeting, as well as weakening growth prospects, could still cement the September cut in the coming weeks, according to ING.
BNP Paribas expects the statement to indicate significant progress in the fight against inflationbut recognizes that internal pressures The outlook for prices remains firm. They expect a 25 basis point cut in both September and December, and for the deposit rate to reach 2.50% in 2025.
UniCredit says the ECB is unlikely to proceed with consecutive cuts in official interest rates due to the inflation rigidity of services prices, strong wage growth and a resilient labour market. In his view, the official interest rates will remain restrictive until they reach around 3%.
According to the Italian bank, the ECB is expected to make two more cuts in 2024, followed by Quarterly cuts of 25 basis points “President Lagarde’s comments should leave the door open for a rate cut in September, albeit with softer signals than those preceding the June cut,” said Bill Diviney, chief eurozone economist at ABN Amro. The ECB is expected to cut interest rates in September will cut rates in Septemberprovided that wage and inflation data do not reveal significant upward surprises.”
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