By The European Central Bank (ECB) is widely anticipated to reduce interest rates by 25 basis points this Thursday. This decision comes just before the US Federal Reserve’s own expected rate cuts in mid-September.
With inflation in the eurozone moderating to a three-year low of 2.2% in August, the ECB’s primary focus is now on stabilising growth, which remains fragile.
The Frankfurt-based institution is likely to maintain a cautious stance on monetary policy as it seeks to balance inflation control with economic growth in the region.
Eurozone inflation reaches three-year low
In August, eurozone inflation fell to a three-year low of 2.2%, driven by lower energy costs and reduced consumer demand.
Core inflation, which excludes volatile items such as energy and food, remains higher at 2.8%, indicating persistent price pressures within the services sector.
This divergence suggests that while headline inflation may appear subdued, underlying price dynamics could still present challenges for the ECB as it decides on its next policy steps.
The anticipated 25-basis-point rate cut by the ECB is aimed at supporting economic growth across the eurozone. The ECB’s key interest rate currently stands at 3.75%, following several aggressive hikes over recent years.
A weaker-than-expected economic performance in the second quarter of 2024, particularly in manufacturing and consumer demand, has prompted economists to revise down their growth forecasts for the euro area.
Source: CNBC
According to Société Générale, the “weakness in manufacturing could spread and impact strong labour markets,” underscoring the need for continued monetary easing.
Bundesbank shifts stance on rate cuts
The Bundesbank, traditionally one of the more hawkish members of the ECB Governing Council, has signalled a shift in its position.
President Joachim Nagel has indicated support for a rate cut, provided the economic data supports it. This change in stance comes as the ECB prepares to release its new economic projections.
While major revisions to inflation or growth figures are not expected, the updated projections will provide crucial insights into the ECB’s future policy direction.
Mixed signals from ECB policymakers
While most analysts expect the ECB to pause rate cuts after September, there are growing discussions within the Governing Council regarding the potential for more rapid reductions.
ECB Chief Economist Philip Lane recently hinted at this possibility, stating at the Jackson Hole economic symposium that a “return to target is not yet secure.”
Lane also cautioned against the risks of “chronically below-target inflation” if rates are kept too high for too long.
This underscores the ongoing debate within the ECB on how to strike a balance between managing inflation and supporting growth.
The ECB’s upcoming meeting in October, to be held in Ljubljana, Slovenia, could be pivotal in determining the future path of interest rates.
With inflation showing signs of stabilising but economic growth remaining uncertain, the ECB faces a delicate balancing act.
The central bank will need to carefully consider the risks of acting too soon versus too late in its effort to guide the eurozone economy back to a sustainable growth trajectory.
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