A growing number of European Central Bank policymakers are lining up behind another interest rate cut in September and only major data surprises in the coming weeks could delay the move, on and off record conversations with seven sources indicate.
Financial markets already overwhelmingly expect a fresh rate cut next month, but policymakers have been circumspect on their next move after the central bank was criticised by some for too overtly committing itself before its first rate cut back in June.
A raft of figures on growth, wages and prices in recent weeks has started to sway them and many are increasingly open to discussing their views, arguing that conditions laid out for a cut are being fulfilled.
The sources, who are familiar with the discussion and said they are open to another cut on Sept. 12, listed a host of arguments: price pressures are easing as projected, economic growth is falling short of expectations, wage growth is softening and the U.S. Federal Reserve’s signals about its own easing make the ECB’s job easier.
“We are largely where we want to be,” Latvian policymaker Martins Kazaks said when asked about a cut in September.
“Our June projections assumed two more rate cuts this year and right now I don’t see any reason why we shouldn’t follow through,” said Kazaks, just days after Finland’s Olli Rehn already made the case for a cut next month.
The other sources, who declined to be named, said private, informal conversations are showing broad support for the move, even if most are still awaiting further data before finalising their views.
ECB policymakers rarely take formal votes and most decisions are passed with a wide consensus suggesting that if policy hawks are already starting to align with a September cut, the decision is unlikely to be controversial.
ECB President Christine Lagarde, whose support for the move will be vital, has yet to send any signal about the September decision and has made no public comments on ECB policy in weeks.
An ECB spokesperson declined to comment. The sources added that formal discussions have yet to start and there are still important data releases before Sept. 12.
OCTOBER EXPECTATIONS
The sources, many of them considered conservatives or policy hawks, said that communicating the move may be more difficult than the decision itself.
Some fear that a cut could stoke expectations for a follow up move in October and they are keen to temper investor bets, keeping market pricing consistent with quarterly cuts.
Markets currently see a more than 90% chance of a September cut and forecast at least another move over the rest of the year, to be followed by steady cuts in 2025.
“My worry is October and not September,” one of the sources said. “We need to make sure that the September cut doesn’t stoke expectations too much.”
The chief argument in backing a cut is that easing was anticipated when inflation was on the ECB’s predicted path.
While inflation has come up a bit over the summer, wage pressures are clearly softening and corporate profits are also absorbing some wage increases, so underlying price pressures are easing.
Interest rates will also remain high enough to restrict growth so a cut is merely easing up on the brake, the sources said.
There is also an expanding camp worrying about lacklustre growth.
A long-anticipated rebound is failing to materialise and Germany, the euro zone’s biggest economy, is skirting a recession amid a deep downturn in industrial output.
“We need to make sure we’re not holding back growth more than necessary because a soft landing is not a done deal,” a third source added.
The sources, however, all agreed that the ECB cannot further delay getting inflation back to its 2% target. It now sees that being reached in late 2025 and there is no appetite in letting this slip into 2026.
“It’s a fairly hard deadline for me,” a fourth source said. “Unless there is a shock, we need to get there next year to preserve credibility.”