ECB meeting - Lagarde’s busy summer

No guidance - The statement alongside the press conference remained very neutral and refrained from giving any kind of guidance on the next move. It continued to signal that it ‘is not pre-committing to a particular rate path’ and that it will ‘continue to follow a data-dependent and meeting-by-meeting approach’. During the press conference, President Christine Lagarde was stubborn in refraining from giving any explicit guidance on future rate moves.

Busy summer - However, reading between the lines, it seems that if data continued to confirm the ECB’s base line scenario, that a second reduction in its policy rates will follow in September. Ms Lagarde noted that ‘we are at the stage that additional data (not data points) matter, if that data confirms the disinflationary process that is at work, it will reinforce our confidence. We shall see’. She also confirmed that the September meeting is ‘wide open’ and that the Governing Council would be getting a lot of data, as well as the updated projections, in what would be a ‘busy summer’. Over the coming months, the following key data will be published: two inflation readings (July, August), compensation for employees for Q2, negotiated wages as well as the Indeed wage data.

Confidence on wage outlook - The ECB continued to judge that domestic price pressures (wage growth and hence services inflation) were too high. Having said that, it is very clear that the central bank is confident that wage growth would come down to acceptable levels. The ECB President said that ‘everything’ (as in all of the evidence) suggested that the direction of wage growth in 2025 and 2026 would be downwards. Indeed, the evidence pointed to wage growth compatible with the inflation target next year and ‘even more so’ in early 2026. In the meantime, in line with the ECB’s base case, ‘the inflationary impact of high wage growth has been buffered by profits’.

September cut on the cards - We think that signs of ongoing disinflation going forward will set the scene for a rate cut at the September Governing Council meeting. We then expect a rate cut at each subsequent monetary policy meeting until a terminal rate of 1.5% is reached.