ECB Insight: With Everyone Potentially on Board, ECB to Cut by 25BP and Leave Oct Open

10 September 2024

By David Barwick – FRANKFURT (Econostream) – Could the European Central Bank Governing Council actually be unanimous in its decision Thursday to cut interest rates by another 25bp?

One can rejoin that it doesn’t matter, as there seems little doubt either that precisely such a decision will be the outcome of this monetary policy meeting, or that the support for it will be overwhelming in any case.

The fact that one can wonder about the possibility of unanimity underscores the certainty surrounding a decision that, at least officially, remains ‘open’, as ECB President Christine Lagarde insisted it would on 18 July.

Developments since the first rate cut of the cycle three months ago should leave Lagarde with some sense of relief about the (relative) clarity that prevails concerning what the ECB will do. Things could have turned out so differently, and she knows it.

The flip side of that coin is that Austrian National Bank Governor Robert Holzmann may find himself between a rock and a hard place.

Although Holzmann’s tone at his most recent chat with Econostream not two weeks ago was more hawkish than our write-up of the conversation lets on, we don’t exclude that he will see his way to backing a cut on Thursday.

If the solitary holdout at June’s meeting is on board for the sequel, it is not at all obvious that anyone else would care to don the mantle of dissenter.

For this rosiest of all scenarios to materialise, it might be sufficient if the updated macroeconomic projections continued to show the ECB’s price stability target of 2% reached no later than the end of next year.

There is a chance of this being the case. How far off can the new projections be, when Executive Board member Isabel Schnabel said days ago that ‘incoming 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’?

Even if there is a certain slippage, it should be minor, based on comments from a range of Council members.

Under such circumstances, it could be difficult for Holzmann to justify withholding support yet again to himself, let alone publicly, and easier to force a smile and claim satisfaction at having been able to get behind the cut along with everyone else.

We note that one salient concern of his, namely that the Fed could stand idly by while the ECB eases time and again, seems to have been dispelled; indeed, this risk could invert. And his argument for supporting the June cut – before he reconsidered – was weak growth, of which there has been plenty more since.

It is therefore more appropriate to wonder whether we could get a unanimous decision on Thursday – not whether the ECB will do anything other than cut by 25bp.

Lagarde – along with most of the Council – will have concluded that easing has gotten off to a promising start. The final word may not be spoken for years to come, but in an uncertain world, June appears at the moment to have been well chosen.

Similarly, the quarterly 25bp pace – and thus the decision to stay on hold in July – seems to be regarded by hawks and doves alike as appropriate for the circumstances.

The only drop of bitterness is lingering awareness of having mishandled the communication ahead of the June cut. Stung by the validity of this reproach, the ECB will understandably want to stick tightly to a data-dependent, meeting-by-meeting approach that, as last time, leaves everything open.

Though there are well-known reasons not to exclude a sudden change in the environment, not only don’t we expect any signal about an October cut, but we doubt there will be any such cut. With only 35 days between this and the next monetary policy meeting, the change required for the ECB to deliver one seems improbable.

The ECB could at some point become confident enough in disinflation to ease faster, or want an additional cut at a non-projection meeting for fine-tuning purposes, but such arguments for adjusting the pace would garner little support today, with even doves preaching gradualism and fine-tuning something for much later.

Naturally, certain Council members look forward to each cut more keenly than others. Some, like Bank of Greece Governor Yannis Stournaras, are always ready to argue in favour of supporting economic activity – or even, in the case of Banque de France Governor François Villeroy de Galhau recently, to focus on the growth differential of the euro area vis-à-vis the US, as if that were the ECB’s mandate.

Should activity weaken further, we would expect those preoccupied with growth to mount a stiffer challenge to their colleagues who argue for now that economic softness won’t do the inflation-fighting job for them.

And in general, once the ECB is significantly closer to the terminal rate, it is only natural for differences of opinion to emerge in starker relief, just as the last hike of the tightening process – which Chief Economist Philip Lane saw as a form of ‘insurance’ - was relatively controversial within the Governing Council.

A large majority of Council members across the spectrum seem comfortable for now with how the ECB is proceeding, and we don’t see unmanageable rifts emerging in the next month or two. Policymakers see the risks as sufficiently balanced to regard staying the course of gradual, measured cuts the most sensible option.

This is why we do not consider the ECB’s current approach as simply Lagarde’s path of least resistance, enjoying the fleeting support of secretly reluctant policymakers.

Rather, the high degree of unity suggests to us that, barring a change in the environment, moderate steps every quarter without precommitment is how things are likely to be for the rest of 2024 and quite possibly into 2025.