(Bloomberg) -- President Christine Lagarde said the European Central Bank’s next interest-rate meeting is “wide open” — hinting that another cut is possible as officials will have significantly more information on inflation by then.
“The question of September and what we do in September is wide open and will be determined on the basis of all the data that we will be receiving,” Lagarde said Thursday after the ECB kept its deposit rate at 3.75%.
She said officials have been scrutinizing the three crucial elements underpinning their inflation outlook — wage growth, corporate profit margins and productivity — and will “have a lot more of that in the coming weeks and months.”
“If that data actually confirms the disinflationary process that is at work in the moment, it will reinforce our confidence” in returning consumer-price growth to the 2% goal in late 2025, as currently envisaged, Lagarde told journalists in Frankfurt.
After last month’s landmark cut, the ECB is weighing whether euro-zone inflation is cooling sufficiently to allow further such steps. While June saw a small dip to 2.5% from 2.6%, underlying pressures held firm and the advance in services costs again topped 4%.
Policymakers have been guarded on their plans. But officials are increasingly wondering if they may only be able to lower rates once more this year, according to people familiar with the matter who asked not to be identified because deliberations are private.
Markets are leaning toward two more reductions this year — assigning about an 80% probability to the first arriving in two months.
By then, officials will have fresh economic forecasts and two more inflation readings, as well as figures on wages, profits and productivity. There may also be more clarity on the Federal Reserve’s intentions, with markets anticipating that US monetary easing will kick off the week after the ECB’s September meeting.
For now, the ECB said consumer prices are behaving more or less as foreseen in its last round of quarterly projections, in June.
“The incoming information broadly supports the Governing Council’s previous assessment of the medium-term inflation outlook,” it said in a statement. “At the same time, domestic price pressures are still high, services inflation is elevated and headline inflation is likely to remain above the target well into next year.”
Once again, the ECB said it isn’t “pre-committing to a particular rate path,” while reiterating its “data-dependent and meeting-by-meeting approach.”
According to Lagarde, wage gains remain elevated but are receding, though productivity has only demonstrated “a little bit of progress” that’s “certainly not what we would like to see.”
The ECB said “profits contracted in the first quarter, helping to offset the inflationary effects of higher unit labor costs” — a trend it sees continuing in the near term. It attributed some of the persistent underlying price pressures last month to “one-off factors.”
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“We think the ECB will then remain on a quarterly pace for rate cuts with the following move coming in December. By then, headline inflation is likely to be below target and that will probably make such a restrictive stance hard to justify.”
—David Powell, senior economist. Click here for full REACT
But while inflation is broadly in retreat, there are signs that a recovery in the euro area’s 20-member economy is losing steam with rates still elevated. Political turbulence in France and globally isn’t helping.
“The incoming information indicates that the euro-area economy grew in the second quarter, but likely at a slower pace than in the first,” Lagarde said. “Looking ahead, we expect the recovery to be supported by consumption driven by the strengthening of real incomes, resulting from low inflation and higher nominal wages.”
She warned, though, that risks to growth are tilted to the downside.
The upshot for economists in a poll this month was a prediction of quarterly rate reductions — to coincide with policy meetings that include updated projections. They see the cycle culminating in autumn 2025, with the deposit rate reaching 2.5%.
Lagarde stressed that between now and September, the ECB will receive “a lot of information” — echoing language she used repeatedly in the runup to June’s rate cut.
“That’s what we will be looking at to see whether or not it confirms the path that we are seeing,” she said. “So I’m afraid that it’s going to be a bit of a busy summer.”
--With assistance from William Horobin, Bastian Benrath-Wright, Constantine Courcoulas, Marilen Martin, Christoph Rauwald, Celine Imensek, Alessandra Migliaccio, Chiara Albanese and Jennifer Duggan.
(Updates with ECB officials in sixth paragraph.)
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