ECB Reaction: unconvincingly dialling back
Hugo Le Damany and François Cabau, Economist and Senior Eurozone Economist at AXA Investment Managers, comment on the ECB's latest Governing Council meeting:
- The European Central Bank's (ECB) Governing Council (GC) decided on a 25 basis points (bps) rate cut taking the deposit facility rate (depo rate) to 3.5% as widely expected.
- The GC resisted to start committing more about future policy decisions as we expected.
- Forecast revisions reveal a hawkish skew which together with the proximity of the October meeting makes a rate cut then very unlikely, in line with our baseline while markets are still pricing 13bps worth of cuts.
- We continue to expect one more cut in December followed by two more at forecast meetings next year.
A second rate cut as expected. In line with our long-held call (unchanged since September 2023), the ECB GC decided to cut the depo rate by 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 refinancing rate (refi rate). The latter is now 3.65% (-60bps) with no expected meaningful ramifications if ample excess liquidity remains. In its press statement, the ECB reminded that the depo rate is “the rate that steers the monetary policy stance”.
Further guidance may come later. The ECB press statement kept the same sentence from previous meetings: “The Governing Council is not pre-committing to a particular rate path”. As we argued in our preview, the quarterly frequency of data on which the ECB relies to make its judgement is key. Q2 data have been reassuring enough for the ECB to continue to dial back the restrictiveness of its monetary policy, but not convincing enough to alter its forward guidance to guide about future cuts more proactively - possibly because the GC is broadly happy with the market pricing 40bps worth of cuts in by the end of the year.
Furthermore, uncertainty runs high on upcoming budget sequence in a few member states, as well as the election outcome in the US. During the press conference, President Lagarde ventured to highlight the proximity of the October meeting which, given their data-dependence, rather than data-point dependence, makes an October meeting cut very unlikely in our view. We find ourselves surprised that 13bps worth of cuts are still priced in for that meeting. Otherwise, the market reaction has been relatively muted, not quite reflecting the hawkish tilt of the meeting.
Hawkish tilt in forecast revisions. Despite a significant miss in their Q2 GDP forecast (in magnitude: 0.2 percentage points - ppt - and composition), we were surprised by the slight downward revision (-0.1 ppt across the forecast horizon) in ECB’s forecasts, projecting euro area growth at 0.8%, 1.3% and 1.5% in 2024/25/26 respectively, remaining above our own (0.7%/0.9% for 2024/25). The dovish tilt that these could have sent was overshadowed by upside revisions in domestic price pressures, across compensation per employee and labour productivity (Exhibit 1), fuelling a 0.1ppt upside revision in core inflation forecasts to 2.9% and 2.3% in 2024 and 2025. Said differently, in the ECB’s view, weaker-than-expected domestic demand in Q2 2024 is unlikely to repeat and thus does not carry any downside in consumer prices going forward. In fact, quarterly core inflation path has been revised up significantly for the three first quarters of 2025, leading to a 0.1ppt upside revisions in headline quarterly path but in Q4 25, still landing at 2.0% year on year (y/y).
Our call is unchanged for next cut in December. We maintain our long-held call of a 25bps rate cut in December, and two more in March and June next year. While in principle live, we think it would take quite a shocker regarding the growth and inflation dataflow for the ECB to cut rates again in October. Running into the December meeting (12 December) which will unveil the first batch of 2027 ECB’s forecasts, Q3 2024 euro area negotiated wages will be published on 19 November, as will compensation per employee/profits on 6 December.
Notes to editors
All data sourced by AXA IM as at 12 September 2024.
