INCREASING risks to Europe’s growth outlook have reinforced the case for a policy adjustment when the European Central Bank (ECB) meets next month, according to Governing Council member Olli Rehn.
“In my view, the recent increase in negative growth risks in the euro area has reinforced the case for a rate cut at the next ECB monetary policy meeting in September – provided that disinflation is indeed on track,” the Finnish central bank chief said on Monday (Aug 19).
Rehn reiterated earlier comments that inflation’s path to the ECB’s 2 per cent medium-term goal is still likely to be “bumpy” this year, but that the bank has made considerable progress since the 10.6 per cent peak reached in October 2022.
“Meanwhile, the bad news relates to the growth outlook: there are no clear signs of a pick-up in the manufacturing sector, even though the energy cost drivers of the weak performance seem to have largely faded away,” Rehn said.
Rehn’s comments are among the first from a Governing Council member during the ECB’s summer break and arrive less than a month before rates are next set. After June’s landmark cut, September’s policy meeting will determine whether officials consider inflation to be moderating sufficiently to allow a second reduction.
New quarterly projections for consumer prices and economic growth will play an important role in that decision. Inflation unexpectedly quickened to 2.6 per cent in July, while productivity data further questioned the ECB’s ability to hit its 2 per cent price target at the end of 2025, as it currently envisages.
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At the same time, there are signs the economy is faring worse than anticipated – even after growth in the second quarter beat economists’ expectations.
Markets are pricing in at least two more rate reductions this year.
Rehn said uncertainty from trade wars and conflicts in Europe and the Middle East are among the factors that explain the weak economic growth projections for Europe this year. He added that the widening productivity gap between Europe and the US is “an immediate concern”.
“If manufacturing sector investments fail to recover and growth continues to depend on services, the projected pick-up in productivity growth may be jeopardised,” he said. “We must also consider that the slowdown in industrial production may not be as temporary as assumed.” BLOOMBERG
