(Bloomberg) -- Clues on when the European Central Bank will next cut interest rates were in short supply on Thursday, with President Christine Lagarde and colleagues awaiting data on how drastically the economy is deteriorating — and how that will shift inflation.
In lowering its key deposit rate by a quarter-point for the second time this year — as expected — the ECB reaffirmed that it won’t commit to a particular course for borrowing costs. Lagarde simply said that the downward trajectory is “pretty obvious.”
The decision was accompanied by slight downgrades to projections for euro-zone output over the next three years — underscoring a worsening backdrop that some analysts see dampening price pressures and accelerating rate cuts from their current quarterly pace.
But the outlook for underlying inflation was nudged higher for 2024 and 2025. That, alongside Lagarde’s lack of guidance, saw traders pare bets on the ECB lowering rates next month before a widely anticipated move at the year’s final meeting in December.
“Lagarde is avoiding committing to a monetary-policy path, and with the Frankfurt institution revising its 2024 inflation projections on the upside and growth expectation to the downside, we don’t expect clarity soon,” said Kevin Thozet, a member of the investment committee at Carmignac. “Data dependency remains central.”
Money markets now put the chances of an October reduction in the deposit rate from its current 3.5% at 20% — down from about 40% earlier this week. People familiar with the situation said the door to a move then isn’t fully closed, but it’s unlikely.
What Bloomberg Economics Says...
“The Governing Council will probably resist pressure to move again in October and wait until December to cut when it has more data on price pressures.”
—David Powell, senior euro-area economist. For ECB REACT, click here
The hesitancy stems from officials refusing to sound the all-clear on inflation, which at 2.2% in August is within clear sight of the 2% target but which is also facing upward pressure from rising salaries in the services sector.
Lagarde warned that advances in wages will remain high and volatile, albeit as overall growth in labor costs moderates. The economic recovery, meanwhile, “is facing some headwinds” and risks remain tilted to the downside, though less restrictive monetary policy should eventually support consumption and investment.
A long-promised revival in household spending is yet to materialize.
“The outlook is becoming increasingly stagflationary,” said Geoffrey Yu, a senior strategist at BNY. “Given the recent data run out of Germany, risks to growth are clearly still to the downside.”
Others, though, see the souring economy dragging price gains down, too — raising the prospect of a return to the pre-pandemic days of sub-par inflation that would require more — not less — monetary loosening.
Joining a recent breaking with the consensus among analysts for rate cuts each quarter until borrowing costs hit 2.5%, Goldman Sachs this week forecast reductions at every meeting next year until a level of 2% is reached in July.
There’s also the US. The Federal Reserve is widely tipped to join the ECB and the Bank of England next week by beginning to ease policy. Viewed in some quarters as acting late, the Fed may lower rates rapidly, encouraging peers to follow suit.
“Given downside risks and currency impacts, it is likely the ECB will need to fall in line and match the regularity of Fed cuts by early 2025,” said Seema Shah, chief global strategist at Principal Asset Management.
For now, the future is foggy, with one new inflation reading and the monthly survey of purchasing managers but little else in the way of hard economic numbers due before October’s decision. In the absence of pointers, that leaves investors pouring over what data does arrive — much like the ECB itself.
“We shall remain data-dependent,” Lagarde said Thursday. “A declining path is not pre-determined — neither in terms of sequence, nor in terms of volume.”
--With assistance from Mark Schroers, Alexander Weber and Jana Randow.
©2024 Bloomberg L.P.
