ECB Meeting - ECB keeps October call open

ECB President Christine Lagarde explained that it was a unanimous decision. This reflects that the Governing Council’s confidence in the inflation outlook is building, while reductions from this level of the policy rate are about removing a degree of restriction rather than monetary easing. The confidence in the inflation outlook partly stems from the stability of the projections. The ECB head noted that it was the fifth consecutive projection round where inflation was projected to return to the 2% target by the end of 2025.

The one blot in the inflation landscape was domestic inflation, which the Council judges is still too high and needed careful assessment and monitoring. Having said that, the three drivers of domestic/services inflation – wages, profits and productivity – were broadly going in the right direction and should continue to do so. Although wage growth would still remain elevated for some time, a number of indicators suggested it would fade during the course of next year. This assessment meant that the current elevated levels of domestic inflation were not judged to be a barrier to cutting the policy rate further.

The question of what happens next is one that the ECB is neither willing nor able to answer right now. The statement made clear as in previous meetings that ‘the Governing Council is not pre-committing to a particular rate path’. In the press conference, Ms Lagarde did say that the direction was ‘obvious’ but would not pre-commit to either the ‘sequence’ or ‘volume’ of rate reductions.

One clue with regards the prospects of an additional rate cut at the October meeting is perhaps what the ECB President did not say. On previous occasions, she subtly moved expectations away from the subsequent meeting by talking about the lack of new information by that time. She declined to do so when invited to do so by a reporter. This suggests the Council wanted to keep its options open.

This seems wise on a number of grounds. First of all, there are a significant number of economic reports before that meeting (September inflation, September eurozone PMI's, the Indeed wage tracker data for September and possibly October, labour costs for Q2 and some national wage measures, including German negotiated wages). Second, there is already some downside to the projections presented today. For instance, oil prices are significantly lower than assumed in the September projections, which would probably have meant the ECB forecasting below-target headline inflation next year. We expect further 25bp cuts at each of the October and December meetings.