The European Central Bank (ECB) is expected to leave interest rates unchanged at its meeting on Thursday and stress the need for more data before further easing its monetary policy.
In June, at its previous meeting, the ECB decided to cut interest rates by 25 basis points. The rate on core refinancing operations fell to 4.25%, the rate on the permanent liquidity line fell to 4.50%, and the rate on the permanent deposit fell to 3.75%.
It was the first decline in five years after an unprecedented surge in credit to combat high inflation.
However, ECB President Christine Lagarde warned that the pace of future cuts remained “highly uncertain”.
“Our work is not finished and we must remain vigilant,” he said in early July.
“It will take time” to collect “sufficient data” to be confident that price growth is moving towards the 2% inflation target set by the ECB, he insisted during the ECB forum in Sintra.
The ECB should therefore “go into the summer holidays without further interest rate cuts,” according to Fritzi Köhler-Geib, chief economist at state bank KfW.
The eurozone’s annual inflation rate fell to 2.5% in June from 2.6% in May. But core inflation, which excludes the most volatile energy and food prices, remained steady at 2.9%.
In updated forecasts published in June, the ECB expected inflation to return to 2% at the end of 2025.
According to Carsten Brzeski, an analyst at financial company ING, “the next ECB cut will happen in September,” but “this does not necessarily mean that there will be a series of consecutive cuts.”
The ECB must make clear that what happened in June “was the beginning of a process,” said Gilles Moeck, chief economist at AXA IM.
Moëc also expects the next rate cut to come in September, recalling that the market now prices the probability of another cut happening on that date at 87%.
“A precondition” for a rate cut in September is that “by then, signs of slowing wage growth will have multiplied,” Koehler-Gabe said.
For his part, Bank of America’s chief European economist Ruben Segura-Cayuela said the hypothesis “would continue to suggest two more contractions this year,” although recent inflation and wage growth data maintain uncertainty about a contraction in September.