ECB Insight: On Track for a 25BP Rate Cut Next Month

30 August 2024

By David Barwick – TALLINN (Econostream) – If the hawks at the European Central Bank ever seriously entertained hopes of staving off a rate cut on 12 September, those hopes will have dwindled significantly with the release Friday of euro area inflation data confirming the continuation of the disinflation process.

As we consider the range of comments made by Governing Council members in the last week or so, though, we are inclined to think that those in the hawkish camp haven’t really had their sights set on next month anyway. Absent new game-changing information, too heavy would the burden of proof have been for those opposing a follow-up to June’s 25bp cut.

For some, it is instead about pre-empting colleagues who may start clamouring for another move in October, notwithstanding the absence then of updated macroeconomic projections. Others, wary of the risks, see a potential for developments to force policymakers to pause come December.

At any rate, no one has been particularly convincing in terms of mounting meaningful opposition to a September move.

That said, we initially wondered if Chief Economist Philip Lane was preparing markets for a significant upward revision of the inflation forecast with his comment on 24 August that ‘the return to target is not yet secure.’

Feeding into that perception, one Governing Council member who spoke to Econostream recently characterised Lane’s attitude as ‘very careful’, made it clear that he considered this highly unusual, and suggested somewhat ominously that there was a ‘good reason’ for Lane to have expressed himself thusly.

On reflection, we consider Lane’s remarks on the whole to have been balanced, including as they did words of caution concerning ‘a rate path that is too high for too long’.

And whether it was due to information received in the interim – Lane would be one of the very first to have knowledge of the updated projections - or a desire to correct any erroneous hawkish impression, Lane sounded his usual self on Thursday, leaving us with little doubt – again, barring the unforeseen – that he will throw his weight behind a cut next month.

De Nederlandsche Bank Governor Klaas Knot didn’t sound like he was necessarily poised to oppose another cut when he spoke on Tuesday, though he left himself a clear out.

‘[A]s long as our disinflation path still converges towards a return to 2% inflation at or before the end of 2025, then of course, I'm comfortable with gradually taking our foot off the brake because then we need less restriction’, he said.

On the face of it, Knot could thus easily be among the ‘ayes’ on 12 September, provided there was no slippage in the date at which 2% headline inflation is reached. But even this is not that simple; we note our piece here a week ago rejecting the idea that such slippage would inevitably be incompatible with further policy easing.

Bundesbank President Joachim Nagel constitutes for us, albeit inadvertently, a strong reason to think the ECB is likely to cut in two weeks. ‘[A] timely return to price stability cannot be taken for granted’, he warned yesterday. ‘Therefore, we need to be careful and must not lower policy rates too quickly.’

What ‘too quickly’ means is left to the reader to judge, a pattern we observe with others in the hawks' camp. At any rate, those are not the words of someone who expects to marshal the support of like-minded colleagues and then dig in his heels in opposing a rate cut.

One could say much the same about Executive Board member Isabel Schnabel, whose comments here in the Estonian capital today provided similarly scant grounds to think the hawks see much point in taking a serious stand next month.

‘[I]ncoming data have broadly confirmed the baseline outlook, bolstering our confidence that conditions remain in place for inflation to fall back to our 2% target by the end of 2025’, was the first element of her concluding remarks and the snippet of her speech the ECB chose to highlight on its homepage.

Like others, Schnabel urged that policymakers ‘proceed gradually and cautiously’. However, one would look in vain for evidence that she considers a 25bp cut in September to be inconsistent with this.

Tallinn yielded a clearer endorsement of a September cut from Bank of Finland Governor Olli Rehn, who invoked the ‘more subdued’ growth outlook as an argument that ‘reinforces the case for a rate cut in in September’.

His usually more hawkish counterpart from Latvijas Banka, Mārtiņš Kazāks, indicated tentatively but unmistakeably that he was at least open to discussing a rate cut. Against the backdrop of persistent services inflation, the loosening of the monetary reins should be ‘paced’, he said, but once again, a clear indication that a September cut was a no-go was not forthcoming.

And then there is Austrian National Bank Governor Robert Holzmann, interviewed by Econostream just two days ago and clearly not inclined to support more policy easing. On the other hand, two months ago he was all ready to get behind the first rate cut and readily declared as much a week previously, only to become the lone holdout when 6 June rolled around.

With his opposition to a cut in September based in part on his suspicion that price stability could slip further away into the future, it is not excluded that the benign outcome for August inflation will set the stage for him to surprise yet again, this time by siding with the rest of the Council.

In the end, it doesn’t matter much.

So it is that yet again, we think back to what we said here on 16 July to explain why we were already disposed to expect a September cut, namely that until and unless monetary authorities disbelieve the ECB’s projections, then based on the current outlook, the Governing Council has some policy easing to do, and another 25bp in two weeks would be consistent with this.