Below you will find a new from Nadia Gharbi, Senior Economist, at Pictet Wealth Management, in reaction to yesterday’s ECB meeting.
- The ECB decided to cut its deposit facility rate by 25bp to 3.50% at today’s Governing Council meeting, as widely expected. President Christine Lagarde mentioned that the decision was unanimous.
- As result of the ECB’s review of its operational framework, the refi rate and the marginal lending facility will also be lowered to 3.65% and 3.90%, respectively. The changes will take effect on 18 September 2024.
- The ECB’s new staff projections were broadly in line with our expectations. Specifically, while headline inflation forecasts were unchanged from June (2.5% in 2024, 2.2% in 2025 and 1.9% in 2026), the ECB revised its core inflation forecast slightly higher for 2024 and 2025 by 0.1pp to 2.9% and 2.3%, respectively. The 2026 forecast was left unchanged at 2.0%. The ECB cut its growth forecasts by 0.1pp across the forecast horizon to 0.8% in 2024, 1.3% in 2025 and 1.5% in 2026, reflecting weaker domestic demand. The essential point is that the ECB continues to see inflation “dropping to 2% over the course of 2025”.
- Lagarde mentioned that the balance of risks on growth was tilted to the downside, but she did not mention any clear bias regarding inflation, highlighting both downside and upside risks. There was little guidance on the next steps, with Lagarde emphasising that the ECB will remain “2data dependent and follow a meeting-by-meeting approach”. President Lagarde stressed that services inflation “needed monitoring”. She expressed (again) confidence that wage growth would slow down next year.
- So, overall, while the ECB is “not pre-committing to a particular rate path”, according to Lagarde, the new staff projections and the overall tone of the press conference remained consistent with continued, gradual easing for now. Given sticky services inflation and our baseline forecast of three 25bp cuts from the Fed by end-December, we maintain our view that the ECB will pause in October before another 25bp cut at its December meeting. The ECB will receive little data between now and the next Governing Council meeting on 17 October meetings to shift the narrative.
- Risks are tilted towards an acceleration in the pace of rate cuts next year.
