Market News
ECB Officials Stick With Call for Gradual Cuts in Rates - BLOOMBERG
(Bloomberg) -- European Central Bank officials are taking a cautious stance on lowering interest rates — a further sign that the next cut will arrive in December rather than October.
“We should continue to reduce gradually and as appropriate the degree of restriction of our monetary policy,” Bank of France Governor Francois Villeroy de Galhau said Friday. “But the pace has to be highly pragmatic: We’re not pre-committing to any particular rate path, and we keep our full optionality for our next meetings.”
The ECB reduced its deposit rate for the second time this year on Thursday, though President Christine Lagarde stayed tight-lipped after the announcement, prompting markets to reduce the odds of a move coming next month to 20%.
Officials, who first loosened policy in June, are taking heart from the slump in inflation, which stood at 2.2% in August — within sight of the 2% goal. Many are wary of lingering price pressures in the services sector but others worry that the euro zone’s souring economy could lead to inflation undershooting the target as it did before the pandemic.
In light of an uncertain outlook, Governing Council members aren’t yet ruling out a cut at their next decision on Oct. 17 even if such a move is unlikely, according to people familiar with the matter.
“The probability of a rate cut in October, if we look at the financial markets, isn’t big,” said Martins Kazaks of Latvia. “But at the same time, if there’s an unexpected hit to the economy, and if the economy feels significantly weaker than is currently expected and inflation also significantly declines, then of course we could also consider a rate cut.”
His Lithuanian counterpart — Gediminas Simkus — struck a similar tone, highlighting that policymakers “will need strategic patience” as they plot the course ahead.
Inflation is “calming down” and “its trajectory suggests that further rate cuts must happen,” he told Radio LRT on Friday. “Rates will continue declining, but the speed of cuts will depend on data.”
Simkus cited services inflation as the “key uncertainty” — a danger that was also stressed by Slovenia’s Bostjan Vasle and Estonia’s Madis Muller.
There were some more positive assessments of price trends, with Bundesbank President Joachim Nagel describing the outlook as “very good.”
“We assume and the data back us up that we’ll reach our inflation target of 2% by the end of next year,” he told Deutschlandfunk. “The portfolio of data is such that it justified yesterday’s rate cut.”
But the quarterly forecasts underpinning those comments — also published Thursday — showed the economy is likely to expand less than previously envisaged in 2024, 2025 and 2026.
Indeed, after a brief early-year revival, Europe’s growth momentum is fading, with manufacturers still suffering from higher energy costs and soft demand beyond the 20-nation currency bloc. A long-promised consumer-led recovery is yet to materialize.
For some, the deteriorating backdrop is a reason to remain nimble.
Growth “remains slow in the euro area, and downside risks to growth have increased over the summer,” Finland’s Olli Rehn said. “We thus maintain full freedom of action and flexibility in making interest rate decisions in future meetings.”
France’s Villeroy agreed.
“Unlike the US, we don’t have a dual mandate — prices/employment — but we have clearly a symmetric mandate around our 2% target,” he said. “We must be attentive to the risk of undershooting our target as much as to the risk of overshooting it.”
Former ECB Chief Economist Peter Praet reckons the “best scenario” for the officials in Frankfurt is to cut in December. But factors such as an outsized reduction in borrowing costs next week by the Federal Reserve could yet make October possible.
“December is far away, many things can happen,” he told Bloomberg Television’s Tom Mackenzie on Friday. “So the ECB tried to keep optionality.”
--With assistance from Aaron Eglitis, Jan Bratanic, Ott Tammik, Leo Laikola and Milda Seputyte.
(Updates with Kazaks in sixth paragraph)
