The ECB cuts rates for the first time since September 2019, but does not commit to future moves. Deposit rates were lowered yesterday from 4% to 3.75%. Economists are now aiming for a stop in July and a new reduction of 0.25% in September.
Yesterday the new projections from the Eurosystem (i.e. from the ECB in collaboration with the national central banks) were higher hawkish (hawkish) than those of the Frankfurt staff, as has already happened in the past: inflation estimates have been raised for this year (from 2.3 to 2.5%) and for the next (from 2 to 2.2% ), while they remained unchanged for 2026 (1.9%). These are higher values than those of other institutions and may have been influenced by some countries such as Germany. Growth estimates have also been increased.
The ECB decisions
The ECB governing council has decided that it is “appropriate” to moderate monetary restriction. The move was approved unanimously, with the exception of Austrian superhawk Robert Holzmann.
President Christine Lagarde explained that “confidence has increased” in the decline in inflation, despite the increase in estimates. There is now greater belief that we will return to 2% in the fourth quarter of 2025. Lagarde recalled that in October 2022 the cost of living was 10.6%, while in May it reached 2.6%.
Furthermore, the ECB president highlighted that wages will slow down, according to what emerges from leading indices, and that companies are reducing profits, thus absorbing the impact on the cost of living linked to the increase in wages.
The rise in real rates
In addition to this, Lagarde underlined a point highlighted in recent days by the governor of the Bank of Italy Fabio Panetta: compared to September, rates increased in real terms, due to the drop in inflation, even if the ECB did not it’s moved.
Therefore yesterday’s cut only partially offset this effect. The tightening of monetary policy on the economy today is even greater than that of September. The real restrictive effect will continue into 2025, even with further ECB cuts, because as Lagarde recognized the neutral rate is still “far away”.
No default rate path
The governing council, however, specified that it is not committing to any predefined path on rates and confirmed that decisions will be “meeting by meeting”. Lagarde said there is “a strong probability” that the reduction of the tightening will continue but “speed and timing are uncertain” and “sufficient data” will be needed.
In this sense, the ECB president observed that the September projections will provide important information, but this does not mean that there will be decisions only in the meetings with the updating of the estimates.
Market expectations and the macro scenario
The repeated reminders of the importance of the new data have, however, strengthened market economists’ belief that the ECB will cut in September and then December. However, yesterday the markets considered a reduction in July to be 40% probable. Some board members may also be cautious next month due to the divergence from the Fed.
Inflation is expected to decline in the medium term, but there could be “jumps” in the short term, Lagarde reiterated. Prudence is linked to domestic inflation and that in services (which rose to 4.1% in May, from 3.7% in April).
Further confirmations are then necessary on wages. But Lagarde also noted that German salaries in particular had an impact on the latest data: three-year negotiations were concluded in Germany which will not be repeated in 2025. The rate cut was defined as “appropriate, coherent and also necessary” by the Minister of Economy Giancarlo Giorgetti.
Meanwhile, yesterday Lagarde rejected French President Emmanuel Macron’s proposal to include growth and climate among the ECB objectives together with price stability: “We don’t see the need for it.”
Lagarde then said that the possibility of a Fed-style “dot plot” with central bankers’ rate forecasts, as proposed by board member Isabel Schnabel, is “an interesting concept and I think I would leave it as such.” (All rights reserved)
MF – Number 112 pag. 3 of 06/07/2024
