Tomorrow's ECB decision

2024-21

Photo by Dimitri Karastelev on Unsplash

This is what I believe ECB president Christine Lagarde will say at the press conference after Thursday’s Governing Council meeting:

• The ECB has made progress lowering inflation over the last year and the Governing Council therefore decided to cut interest rates by 0.25%.

• This is the second time the ECB cuts interest rates. The process of relaxing monetary policy that it started in June is continuing. The speed of reduction of interest rates will be slow and will depend on how quickly inflation declines towards the ECB’s 2% target.

• While growth is weakening, inflation pressures remain too high and are persistent. Services inflation is a particular concern and the outlook for it is uncertain. The risk that inflation will rise cannot be excluded.

• The Governing Council is data-dependent and will need to see how inflation responds to this cut before considering whether an additional cut is warranted. She will push back hard on the idea that the ECB will necessarily cut interest rates again in October and signal that reductions will be gradual.

• While she will not say so, I believe that in practice that means that the ECB may cut interest rates every second meeting. I expect the next change to come in December unless the data worsens sharply. Changing interest rates at meetings when projections are released is helpful because it makes it is easy to explain policy decisions — and forecasts can almost always be interpreted in such as a way as to justify several different policy actions.

• She will note that the Governing Council is concerned by economic conditions in the euro area. They are different from those in the US. ECB and Fed policy are therefore likely to be different too. Whether the Fed decides to cut interest rates by 0.25% or 0.50% next week will not have any direct implications for the future path of ECB policy.

But we will see!

The views expressed are my own. They should not be seen as constituting investment advice.