The European Central Bank will take a cautious approach to lowering interest rates as political turmoil poses a series of risks to inflation returning to 2%, a foreign media survey of analysts showed.
After the first 25 basis point rate cut in June, respondents expect officials to pause at next week’s meeting. Another rate cut is expected in September, and quarterly until the deposit rate reaches 2.5% in a year.
Analysts now cite November’s U.S. presidential election and the threat of Trump’s return to the White House as the biggest danger to the region’s economy, while unrest in France has stirred memories of Europe’s sovereign debt crisis of the past decade.
Faced with such uncertainty, officials led by Lagarde did not make a commitment to the interest rate path in advance, but promised to make a decision after the data is released. European Central Bank Chief Economist Philip Lane and others said that July mainly provided an opportunity for assessment.
Markets are even more cautious than economists, fully pricing in only one more rate cut from the ECB this year.
“At this juncture, there is simply no urgency to continue cutting rates,” said Carsten Brzeski, head of macroeconomics at ING. “So the ECB will ultimately stick to its data-dependent approach and will refrain from giving any forward guidance.”
Politics are casting an increasingly long shadow. In the U.S., the potential threat posed by Trump is compounded by uncertainty over whether he will face Biden or another Democratic candidate. In the eurozone, France’s early election has unnerved investors, though the situation has stabilized somewhat since the initial shock.
Analysts overwhelmingly said the ECB would not change course because of events in France, with only one of 29 respondents expecting officials to tweak their quantitative tightening program.
Two years ago, when the ECB announced its Transmission Protection Instrument (TPI) to help countries in crisis by buying unlimited amounts of their debt, most policymakers hoped they could control markets without using the tool.
"Adjusting the quantitative tightening program is an option for the ECB before considering TPI," said Dennis Shen, an economist at Scope Ratings.
Only one respondent said the program would be launched within the next three months.
In contrast, there are considerable concerns that economic growth could be weaker than the ECB forecast in June and that inflation could be stronger. The cost of services, in particular, remains a big concern, partly because markets expect strong wage growth to remain in the eurozone.
“Services firms reported that it was supply factors, rather than lack of demand, that were holding them back from increasing output,” said Andrzej Szczepaniak, senior European economist at Nomura Securities. “As a result, severe labor shortages and strong demand for services are likely to keep inflationary pressures in the services sector elevated in the near and medium term.”
He believes next week's meeting should be "unremarkable" with the focus being on "whether the ECB will cut rates again in September."
Some say the growing likelihood of a rate cut by the Federal Reserve could prompt the ECB to act more quickly.
“With economic activity and labor market data appearing to normalize from very strong levels and the Fed’s rhetoric shifting back toward rate cuts, the ECB should reconsider resuming rate cuts,” said Hlias Tsirigotakis, an economist at the Bank of Greece.
Still, no one expects a rate cut next Thursday.
Sylvain Broyer said: "The mixed data coming out makes it difficult for the Governing Council to form a clear view on the extent of the rebound in growth and the underlying trend of inflation, all of which is happening in the context of unstable political situation and nervous debt markets in Europe."
The article is forwarded from: Jinshi Data