The ECB can’t get its story straight
The European Central Bank (ECB) remains conflicted about the pace and timing of future interest rate cuts.
Less than two weeks after Bank of Italy Governor Fabio Panetta said inflation concerns were largely overblown and that multiple rate cuts were still on the table, Ireland’s top central banker told a different story.
“There’s no need to actually rush to make decisions,” said Gabriel Makhlouf, the Governor of the Central Bank of Ireland. In his view, the ECB doesn’t have a “predetermined rate path” and that it was “adopting a meeting-by-meeting approach.”
The ECB cut interest rates in June for the first time in five years—a highly controversial decision it seems to have regretted ever since.
Judging by both Makhlouf and ECB President Christine Lagarde's remarks, the ECB doesn't have much conviction for rate cuts anymore. By Makhlouf’s own admission, the “road has been bumpy” in bringing inflation back to its 2% target.
Like Lagarde, Makhlouf admitted that “in particular on the service side, we’ve got inflation that is just stronger and continues to be strong.”
Although headline eurozone inflation dipped slightly to 2.5% in June, the closely watched core and service inflation figures remained stubbornly high at 2.9% and 4.1%, respectively.
For that reason, ECB officials don’t want to box themselves in a corner on rate cut expectations, even if it means giving conflicting signals about what they plan to do next.
September meeting “wide open”
At its July meeting, the ECB left interest rates unchanged and said the September policy decision was “wide open.” Lagarde avoided hinting at the likelihood of rate cuts but implied that they were still on the table.
Economists are taking the ECB at its word, for now.
“We read all this as another sign that the ECB retains a dovish bias at it eyes a soft landing,” said TS Lombard economist Davide Oneglia, referring to the central bank’s preference to lower rates.
According to Reuter’s July survey of 85 economists, more than 80% said they expect the ECB to cut interest rates two more times this year, with September and December being the most likely targets.
Commerzbank economist Joerg Kraemer agrees, so long as “the inflation data is roughly pointing in the intended direction.”
Economists remain confident in rate cuts because the ECB must eventually turn its attention to the dismal eurozone economy.
Earlier this year, the European Commission slashed its eurozone growth forecast from 1.2% to 0.8%. Meanwhile, the International Monetary Fund forecasts the eurozone economy to grow a mere 0.9% this year.
This came after the eurozone entered a technical recession in the second half of 2023, marked by back-to-back quarters of negative growth. Germany, the bloc’s largest economy, declined 0.5% in the final three months of 2023.
Sam Miley, the managing economist for the Centre for Economics and Business Research, said that the eurozone's “prospects are likely to improve [...] driven by the expectation of interest rate cuts.”