ECB Preview: Another rate cut without more guidance

A second rate cut as expected. 

In line with our long held call (unchanged since September 2023), we expect the ECB Governing Council to cut the depo rate by another 25bps to 3.5% at its September meeting. Consistent with the March GC decision on its operational framework to reduce the spread between the depo and the refi rate, the latter would thus drop to 3.65% (-60bps) with no expected meaningful ramifications. Since its last meeting, inflation data have come broadly in line with the June eurosystem staff forecast, thus consistent with a return to price stability as mentioned by Isabel Schnabel in her latest speech (30 August). The ever crucial wage data have edged lower in Q2 seemingly on a path to converge further down following forward looking indicators. Finally, new technical assumptions are likely to result in lower projected headline due to lower oil as well as higher euro currency (see more below on updated projections). Following a very open July meeting, these have been instrumental to generate a broad consensus within the GC towards a rate cut, including Schnabel, Nagel and Villeroy de Galhau.

Forecast meetings to remain first choice for policy decision. 

We do not expect any significant change in communication that would make the ECB more proactively guiding on future policy decision. First, as we have argued in the past, the quarterly frequency of its key triad (wage, profits, productivity) makes the quarterly forecast meeting most adequate for policy decisions – not providing a clear reassuring message in Q2 24. The ECB does not depend on but still keen to hear from the Fed which has its policy decision next week (18 Sep) in a context of significant financial condition loosening which came from the US during the summer. Finally, the US election will be a key catalyst for possible changes in the macro backdrop, giving no reason for the ECB to pre-empt its upcoming decisions.

Towards a relative shift away from inflation to growth/fiscal concerns. 

Barring a new shock and conditional on a decline in service inflation from September, we think this week’s and upcoming ECB rate decisions are likely to be swayed more so by growth/fiscal concerns than by inflation. Growth concerns appeared already in the July ECB GC accounts, and since then domestic and international news have not been particularly reassuring. As usual, the autumn marks the presentation of 2025 draft budgets, and with five euro countries being placed in the Excessive deficit procedure – under the new fiscal rules – the ECB is likely to be very attentive to the presented fiscal path and the corresponding policy mix.  

Expected forecast changes by ECB staff. 

Nominal variables (inflation, wages) have come broadly in line with June Eurosystem’s forecasts. The ECB is likely to marginally lower headline this year’s annual average to 2.4% (-0.1pt) but we see risks of 0.1pp upside revision to 2.8% for 2024 core inflation forecast. For 2025 and 2026, the ECB should account for lower momentum in oil prices (-6% in average), and stronger euro (+2%). This should result in important revision for headline to 1.9% in 2025 (-0.3pp) and 1.7-1.8% (from 1.9%) in 2026 while core inflation revisions should be much more limited expected at 2.1% (-0.1ppt) in 2025 and unchanged at 2% in 2026.

Euro area Q2 GDP growth was revised down 0.1ppt to 0.2% q/q, lower than ECB’s +0.4% q/q forecast. Furthermore, importantly for the ECB rate outlook, domestic demand contraction deepened in Q2. Private consumption edged lower (-0.1% q/q) in Q2 (ECB June forecast: +0.4% q/q) while private investments fell by a marked 2.2% q/q (ECB : +0.2%; although Ireland seems a key culprit). These miss should trigger a moderate downside revision (most likely closer to our outlook of 0.6% in 2024 and 1.1% in 2025 from 0.9% and 1.4%), only partially offset by implicit lower rate outlook.

No change to our rate call. 

We maintain our long-held call of a 25bp rate cut in December, and two more in March and June next year.