Ready the second rate cut with which the ECB is easing the monetary tightening that began during the energy crisis 2022-2023. The main point in the meeting of the Governing Council of the ECB today will be to evaluate the new economic projections on inflation, GDP growth and unemployment to understand what the direction of monetary policy will be in the coming months. Taking into account the progress made by inflation towards the 2% target, we believe that the choice to cut 25 basis points interest rates is almost certain. The doubts are, instead, linked to the next actions. He underlines this Philip Diodovich, Senior Market Strategist of IG Italia in anticipation of the ECB meeting expected today.
ECB, second annual cut expected today
In detail, we expect that the Governing Council of the ECB may reduce the rates on deposits by 25 bps (basis points) from 3.75% to 3.50% and those on the main refinancing operations by 60 bps from 4.25% to 3.65% (after the decision in March to reduce the corridor between the DFR and MRO rates from 50 basis points to 15 bps).
The choices, as we have mentioned, they are highly discounted by the market because they reflect the trend of fundamentals. In the last three months we have seen inflation move towards the 2% target (from 2.5% y/y in June we went to 2.2% y/y in August). The only concern remains the trend of consumer prices in the services sector, which have grown steadily in recent months, up to 4.2% y/y in August.
The prospects on the variables macroeconomic data could provide clues as to what the Board of Directors’ intentions might be for the upcoming meetings (October 17 and December 12).
However, we do not expect a restoration of the forward guidance. The ECB’s stance will remain dependent on macro data. Only a further slowdown in inflationary pressures and further warning signals on economic growth could push the Governing Council to make two further cuts during 2024.
What prospects?
We believe that the most likely scenario for today be an interest rate cut (25 basis points for the one on deposits and 60 basis points for the one-week refinancing operations). The governor of the ECB, Christine Lagarde, will remain, in our view, very hermetic, trying not to reveal anything about the discussions within the Governing Council to avoid destabilizing the markets. It will be reiterated that the ECB’s approach will continue to be dependent on the evolution of macroeconomic data and only new indications of a strong slowdown in consumer price growth could convince central bankers to cut rates again in September. We maintain our outlook on only one interest rate cut in the next two meetings (October and December) because we assess that inflation could remain at elevated levels for longer than expected.
What are the consequences for the markets?
We estimate that, in the baseline scenario (cut, attitude unchanged dependent (from the macro data) the movements can be very small and only for the short term.
