ECB to deliver fresh rate cut as inflation cools

The European Central Bank is expected to cut interest rates again this week as inflation drifts back down towards its two-percent target, but policymakers will likely stay tight-lipped on future moves.

The ECB began raising rates sharply in mid-2022 to throttle surging consumer prices but has begun to ease the pressure as inflation rates have fallen.

The Frankfurt-based central bank, which sets monetary policy for the 20 countries that use the euro, made its first cut in June, reducing the key deposit rate to 3.75 percent from a record high of four percent.

After taking a breather at its July meeting, the ECB’s governing council is expected to make another quarter-point cut on Thursday, providing further relief for households and businesses.

It will only be the ECB’s second rate reduction since 2019.

“A cut is fully priced in by the market and there seems to be a broad consensus among (governing council) members,” analysts at bank HSBC said in a note.

Policymakers’ confidence in moving ahead with cuts has been bolstered by signs that inflation, which has been bumpy over the past year, is now on a more sustained downward trajectory.

Eurozone inflation fell to its lowest level in more than three years in August, according to official data.

Consumer price rises slowed to 2.2 percent compared to the same month last year, down from 2.6 percent in July, leaving the figure just a whisker off the ECB’s target.

Inflation rates had peaked at 10.6 percent in October 2022 after Russia’s invasion of Ukraine and post-pandemic supply chain woes sent food and energy costs soaring.

– Not waiting –

A lacklustre performance in some parts of the eurozone has also fuelled calls for more cuts to take pressure off the single currency area.

While signs in the first half of the year were positive, recent indicators have pointed to a deteriorating outlook.

The eurozone’s largest economy, Germany, shrank unexpectedly in the second quarter, adding to indications that a hoped-for rebound will fail to materialise this year.

Meanwhile, wage growth, a key area of concern for the ECB, slowed markedly in the second quarter, easing fears that high labour costs could spark a resurgence in inflation.

Rate-setters will also be armed with updates to the central bank’s own inflation and growth forecasts to help guide their decision.

The US Federal Reserve looks poised to start cutting rates at its meeting next week, following recent weak data and a bout of market turmoil.

This will boost confidence among ECB policymakers about forging ahead with their own cuts.

Bank of France governor Francois Villeroy de Galhau, a member of the ECB’s governing council, has been among those calling for a cut at this week’s meeting.

“If we waited until we were actually at two percent to lower rates, we would be acting too late,” said the central bank chief in an interview with French media last month.

– ‘Data-dependent’ –

With Thursday’s reduction a near certainty, investors will be closely watching ECB president Christine Lagarde’s post-meeting press conference for clues about the path ahead.

But analysts say the ECB is unlikely to let much slip about its next moves.

“We do not think that the ECB will provide clear guidance for the future, but remain data-dependent,” HSBC said.

The central bank has in recent times insisted it will not foreshadow its future moves, and will rely solely on incoming data.

Policymakers have reason to be cautious, with signs that inflation in some areas remains stubborn.

Closely-watched core inflation, which strips out volatile energy and food prices, remained elevated at 2.8 percent in August, while services sector inflation accelerated.

Nevertheless, ING bank said it expected the ECB to push ahead with further cuts later in the year in response to the “weakening economic prospects of the eurozone”. (BSS/AFP)