[FRANKFURT] European Central Bank (ECB) officials are increasingly convinced they can keep interest rates unchanged in September, according to sources familiar with the matter who do not see the trade deal between Brussels and Washington causing major economic concerns.
Since rates were left at 2 per cent last month, growth and inflation have developed largely in line with the ECB’s June outlook, said the sources, asking not to be identified discussing confidential debates. That foresaw price pressures dipping in 2026 before hitting the 2 per cent goal again in 2027.
September’s quarterly forecasts are widely expected to confirm such a scenario, the sources said. That would cement arguments by some officials that the ECB is done cutting rates and should preserve policy space for future shocks, while assuaging concerns by others over a persistent inflation undershoot, they said.
An ECB spokesperson declined to comment.
After eight quarter-point cuts in a year, the ECB signalled in July that further action will require a major shift in the economy. Data since have revealed unexpected growth for the euro zone’s 20-nation economy and slightly faster than anticipated inflation.
“I think the bar is high,” Bundesbank president Joachim Nagel said on Friday (Aug 22) in Jackson Hole, Wyoming, where he’s attending the Federal Reserve’s annual symposium. “So it needs a lot to convince me to change monetary policy.”
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While data on Friday showed that the second-quarter contraction in German output was worse than initially thought, hope remains that the continent’s biggest economy will find its feet once a glut of public spending on infrastructure and defence filters through.
There’s also much more clarity on trade following a deal between the European Union and the US, though policymakers remain on alert with some questions still open and US President Donald Trump is known for sometimes changing his mind abruptly.
“Recent trade deals have alleviated, but certainly not eliminated, global uncertainty, which persists on account of the unpredictable policy environment,” President Christine Lagarde said on Wednesday. The tariff now in place is a little above the level the ECB assumed in June but “well below” a severe scenario it had also mapped out, she said.
Underscoring those sentiments, business surveys published on Thursday by S&P Global showed activity hit a 15-month high in August, but they also revealed weakness in exports orders.
Still, policymakers do not see any merit in propping up the economy with a so-called insurance cut, the sources said, citing concerns that such a move would fuel unjustified speculation about deteriorating prospects and the need for a series of additional rate steps.
Another serious blow to the economy or a steep downgrade in the inflation outlook, though unlikely, could still convince officials to lower rates once more this year, they said.
The sources also cautioned against discounting October as a moment for action, arguing that while quarterly projections are an important input into the Governing Council’s deliberations, they are not a prerequisite to move.
No decision has been taken with regard to the September’s meeting, and whatever is decided will incorporate all data available at that time, they said.
Economists still expect a final quarter-point rate cut in December, three months later than they predicted in July. Traders see a less than 50 per cent chance of such an outcome and are not fully pricing any further steps. BLOOMBERG
