ECB Insight: Insiders Say September Cut Possible Even if Earliest Date 2% HICP Is Reached Shifts Into 2026

23 August 2024

By David Barwick – FRANKFURT (Econostream) – In his latest intervention, European Central Bank Governing Council member Mārtiņš Kazāks suggested that a return to the ECB’s 2% price stability target next year was a precondition for a September rate cut. Or did he?

We would observe that, while clearly considering this outcome desirable, he steered clear of declaring it the sine qua non of further policy easing three weeks hence. ECB insiders who spoke to Econostream recently indicated explicitly that the macroeconomic projections to be unveiled on 12 September did not necessarily have to continue to show HICP reaching 2% in 2025 for the ECB to cut again.

‘…I would say that we are still solidly on the path to 2% during 2025’, Kazāks told Bloomberg in an interview on Thursday. ‘I would not like to see, however, this to be pushed into ‘26.’

‘…I don't think that we should risk by not attaining 2% in a sustainable way quite soon and then risking us being hit by some other shocks and then pushing inflation away from the target’, he went on. ‘I don't think that would be appropriate. So 2%, gradually, step by step during ‘25 would be a nice thing to do.’

Indeed, ECB observers and insiders can all agree that for the sake of further easing, it would be a ‘nice thing’ if the date by which euro area inflation returned to the 2% level were not pushed out beyond next year. That does not make it a prerequisite for a second cut.

‘We would simply need to look at the whole path’, responded one insider when asked by Econostream about the case in which 2% headline inflation were to be expected only in 1Q 2026, a deterioration versus the current baseline of 4Q 2025. ‘Certainly, the sooner we are at 2%, the better, unless it means that we are going to undershoot significantly.’

‘It depends on the entire profile of inflation, not just one particular aspect’, another insider said. An outward shift of the date the ECB expected to be back at target didn’t necessarily imply that thereafter, inflation could not actually decline to even below the 1.9% currently foreseen, he suggested by way of example.

It would in any case be ‘an additional element’ of the Governing Council’s discussion if the September projections showed a change for the worse in the date price stability was to be reached, a third insider said.

However, there would be ‘no automaticity’ in the sense that it would inevitably hinder a cut, he said, insisting that it would instead come down to ‘the totality of the data’.

Overall, insiders left Econostream with the distinct impression that any worsening of the inflation outlook – which was not the baseline of any of them – would have to be on the substantial side to dissuade the ECB from cutting interest rates in September.

While none of them offered any precise definition of what that could mean, if the projections were merely to show 2% reached in 1Q 2026 instead of the current 4Q 2025, with no other substantive change for the worse, then we suspect that a 25bp cut would remain at least possible.

That said, a deterioration of the forecast – independent of whether such a development seems likely to materialise - would probably be the single item with the greatest potential to convince Council members to interrupt the easing process.

That was the view of the first insider cited above. Asked what the most likely reason would be for the ECB to refrain from cutting in September, he had to pause to reflect, a pause consistent with the relative certainty expressed by this person that a cut is coming.

‘If, for some reason that’s not apparent, the inflation projection were to increase’, was his hypothetical scenario for no September rate cut. Such an increase, he explained, referred not simply to the date at which 2% was to be reached, but the entire profile of inflation.

As we have said going back to the piece that appeared here on 16 July, we expect the ECB to cut in September. On balance, developments since then – including ongoing economic weakness, the slowdown of wage growth and the increased likelihood that the US Federal Reserve will finally also start easing - tend to reinforce this expectation.

Our reasoning was based on policymakers’ oft-expressed confidence in the ECB’s macroeconomic projections. In a turbulent world, occasional revisions of the projections are inevitable, and these adjustments will sometimes be negative in terms of getting back to price stability.

All things considered, we don’t think another small outward shift in the date at which the euro area gets back to 2% HICP (revised to 4Q 2025 in June from the 3Q seen in March), if it even comes to it, would by itself lead Council members to call into question the continuation of the easing process.