Last week, the ECB held its fifth meeting of the year and, as expected, the European Central Bank unanimously decided to keep interest rates unchanged. While markets were hoping for signals of a possible rate cut in September, they received (almost) none.
Lagarde, both in the official statement following the meeting and during the post-announcement Q&A session, provided no guidance on the ECB’s next steps and, when repeatedly questioned on the matter, emphasised the following points:
- The ECB is not on a pre-defined interest rate path — decisions will be data-dependent and always taken with the aim of bringing inflation back to the 2% target;
- Data dependence is different from reliance on individual data points (in line with Lagarde’s comment that the path back to inflation will be bumpy and that markets should not focus on isolated data releases, but rather on broader trends);
- Interest rates will be kept in restrictive territory for as long as necessary to bring inflation down;
- The September meeting decision remains fully open.
This more cautious approach to market signalling appeared more conservative than the one adopted ahead of the first rate cut in June. The main reason for this shift is that the central bank is clearly not fully confident that the current disinflationary path can be sustained over time. While Lagarde noted that the disinflation process is “underway at the moment,” inflation is expected to fluctuate around current levels this year. In addition, the region remains exposed to several inflationary pressures, such as stronger-than-desired wage growth and external pressures, including geopolitical risks.
That uncertainty was what prevented the members of the Governing Council from cutting rates at this meeting.
However, Lagarde also noted that wage growth was taken into account in the June projections and decisions, and that wage pressures are expected to ease in the coming months. In addition, the ECB President stated that long-term inflation expectations remain broadly stable, signalling that further rate cuts may be warranted if the economic data to be released over the summer support current trends.
After the meeting, market expectations regarding the timing of the next rate cut remained largely unchanged – investors are fully pricing in another rate cut at the September meeting (when a new set of projections will be released) and then a further cut by the end of the year.
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