EUROPEAN Central Bank (ECB) policymakers are increasingly wondering if they may only be able to cut interest rates once more this year, according to sources familiar with the matter.
With inflation pressures still lingering, officials are becoming less confident that a path for two further reductions is realistic, and do not want investors to assume that a move in September is a done deal, said the sources, who declined to be identified because deliberations are private.
Policymakers’ experience of having made too strong a commitment to move in June – when they cut the ECB’s deposit rate by a quarter point to 3.75 per cent even after an acceleration in price growth – are also motivating them to keep all options available for the upcoming decision on Sep 12, according to the sources. They kept rates unchanged at their most recent gathering on Thursday (Jul 18).
Such sentiments were on show when president Christine Lagarde said on Thursday that the outcome of the ECB’s next meeting is still “wide open”. She reiterated that officials will use “all the data that we will be receiving” to determine their course of action after an eight-week pause between decisions.
Traders pared bets on ECB rate cuts on the news: Markets priced in 44 basis points of easing for the remainder of the year versus around 47 basis points previously. The yield on 10-year German bonds rose one basis point to 2.43 per cent. The euro trimmed its earlier losses.
One argument in favour of a cut in September is the performance of the economy, which was weak in the second quarter and may struggle to pick up from there, the sources said. However, services inflation is still too sticky for comfort, which could weigh against such a move, they added.
None of the sources excluded the possibility that two rate cuts could still transpire, and all emphasised that decisions on any move have yet to be taken. Officials meeting on Thursday did not specifically address prospects for the September gathering, they added.
An ECB spokesperson declined to comment on officials’ views on the path for rates. BLOOMBERG
