Please find below a comment from Nadia Gharbi, Senior Economist at Pictet Wealth Management.
- We expect no major surprises at the European Central Bank (ECB)’s meeting on July 18. The ECB is likely to maintain its policy rate on hold and provide little additional information on future interest rate decisions.
- President Christine Lagarde is likely to avoid providing explicit guidance again this month, though the overall policy direction should remain evident as inflation is trending towards the ECB’s 2% target. Indeed, Lagarde has expressed increased confidence that inflation is on a declining path. When the ECB lowered its policy rate from 4% to 3.75% in June, she said it still had “a way to go” before reaching the neutral rate.
- We believe that this week the ECB will consider incoming data as “broadly in line” with the inflation outlook outlined in the June staff projections, justifying a status quo. June purchasing manager indexes (PMI) pointed to a softening but still expanding economy, while core inflation surprised slightly on the upside in June according to flash estimates, driven by sticky services inflation.
- A key focus at the press conference is likely to be on recent (hawkish) wage developments, especially in light of pay demands in Germany from the big trade union, IG Metall, and data from wage tracker Indeed showing that salaries for jobs advertised in the euro area rose 3.7% in the year to June, up from 3.5% in May.
- In all, the Governing Council is expected to stick to its data-driven, meeting-by-meeting approach. Key data releases to watch over the summer include the PMI and inflation reports in July and August, as well as negotiated wages data on August 22.
- Barring any major surprises in incoming data, we continue to believe that the ECB will resume its rate cuts at the September meeting and again in December, bringing the deposit rate down to 3.25%.
