The ECB on Thursday cut rates for the second time in three meetings, as expected.
There was no drama around the decision, or certainly not compared to the competitive histrionics of Fed watchers in the lead up to next week’s first cut from Jerome Powell.
Headline inflation in Europe’s basically back to target, and the new projections were unchanged from June. Headline price growth will average 2.5% this year, 2.2% next and 1.9% in 2026, staff reckons. It’ll drift higher for the balance of the year, but by this time in 2025, price growth will sit sustainably near target, the bank hopes.
As a reminder you hopefully don’t need: Those forecasts are just guesses. Nothing more, nothing less. Yours (your guesses) are probably just as good. Or bad.
As for core inflation, staff revised its projections for 2024 and 2025 higher to incorporate sticky services prices. Still, the ECB expects a “rapid” decline in underlying price growth from 2.9% this year to 2% in 2026.
The growth outlook was marked down “slightly” to reflect “a weaker contribution from domestic demand over the next few quarters.” Staff sees a 0.8% expansion this year before a pick up to 1.3% in 2025 and 1.5% in 2026.
As discussed here late last week, wage growth in Europe on one of the ECB’s preferred metrics came in softer than expected for Q2 at 4.3%. That’s still very elevated by historical standards, but compensation gains will probably abate going forward.
As the figure shows, services inflation’s still double target, but this is one of those instances where you have to ask yourself whether the peanut gallery (which will everywhere and always claim that policymakers are wrong, no matter what they do) is insisting on something that simply isn’t realistic: If the ECB — and the same goes for the BoE — were to wait on services inflation to settle sustainably at or near 2%, they’ll be waiting forever and that wait will eventually dead end in a recession. Such “recommendations” sound good on “finance Twitter,” but they’re not workable in real life.
Anyway, markets expected exactly nothing from the forward guidance and that’s precisely what markets got on Thursday. The ECB will keep rates “sufficiently restrictive” for as long as it takes to ensure that headline inflation returns to 2% and stays there. Or thereabouts.
From here, decisions will be made on “a data-dependent,” “meeting-by-meeting” basis, and the GC’s not “pre-committing to a particular rate path.”
Christine Lagarde’s now 50bps into the easing cycle. My guess — for whatever it’s worth to you — is that the bank will continue to cut using a quarterly cadence.
