It’s a summer central bank meeting and the ECB is expected to sit on its hands on Thursday. That means it will keep the deposit rate at 2%, right in the middle of its neutral range of 1.75% – 2.25%. The Governing Council are likely to stress their continued data dependence and meeting-by-meeting approach with no change in guidance. The lack of urgency shown at the June meeting, with no big surprises in inflation or activity data and renewed tariff uncertainty should provide perfect cover for a quieter meeting, while potentially planning for another rate cut in September.
The ECB delivered another 25bps reduction in the deposit rate at its last meeting in June, where President Lagarde subsequently noted that policy was “well-positioned” to navigate the current uncertainties, with the ECB at or near the end of its cutting cycle. In fact, that was the bank’s eighth back-to-back rate reduction, having slashed rates from 4% at their peak in late 2023. But it was mildly hawkish shift last time around, which removed any expectations for another cut this month.
Tariff uncertainty looms
The current greatest source of uncertainty stems from the ongoing trade frictions between the EU and US. Currently, both sides are attempting to agree a deal ahead of the August 1st deadline, which would see the US impose a 30% tariff on EU goods and the EU likely respond with its own countermeasures. The outcome of the tariff negotiations will be key for monetary policy setting going forward, as tariffs higher than 10% on the EU would deviate from the ECB’s baseline assumptions. Such fears are weighing on the growth outlook and, allied with the appreciation in the euro this year, have stoked concerns that the ECB could undershoot its 2% inflation target.
Data releases have been limited since June, with headline inflation rising to 2% due to energy base effects as expected and the core print steady at 2.3% due to momentum in services inflation. Financial conditions have tightened modestly on account of rising long-term yields and strength in the euro. President Lagarde is likely to be asked about the latter and play a relatively straight bat about what it means for the ECB.
Market pricing
Recent communication by ECB officials has been broadly neutral. But markets are not rushing to adjust expectations of ECB easing this year, with one more rate cut predicted by year-end. However, the timing is slightly uncertain with a September move roughly a coin toss. By then, we will have seen two more inflation reports, PMIs and have new ECB staff projections. Crucially too, we may have some clarity on trade and US tariffs which will help determine if we get at least one more 25bps move after the summer or have to wait until December. EUR/USD has pulled back from its near four-year high at 1.1830 but found support around the April top just below 1.16. The multi-month trend remains bullish with medium-term support around the 50-day moving average just above 1.15.