ECB Holds Key Rate at 4.25% as Markets Eye September for Possible Moves
Analysts expect the European Central Bank to keep the refinancing rate at 4.25 percent and to postpone a fresh rate cut until after the summer break. This view reflects a broad consensus among market watchers, who do not anticipate significant surprises from the Governing Council meeting scheduled for Thursday after the 25-basis-point decrease in June. Accordingly, traders do not foresee notable shifts in stock markets or in the euro, and attention now shifts to September. That gathering could offer clues from President Christine Lagarde about the timing of the next rate adjustment, though certainty remains elusive.
Experts predict that the council will keep the refinancing rate at 4.25 percent, with the deposit rate easing to 3.75 percent and the marginal lending rate at 4.50 percent. Dave Chappell, manager at Combinia Threadneedle Investments, said the meeting this week should close with no change in policy, while Lagarde may speak less explicitly about the calendar for any future moves. Unlike the June session, which investors had eagerly anticipated due to early signals from several central bankers about an initial cut, this week’s gathering is not expected to bring notable revisions, according to Geoff Yu, market strategist for EMEA at BNY. It remains early to gauge how the last rate cut has affected the economy, a view echoed by Guillermo Uriol, investment manager and head of Investment Grade at Ibercaja Gestión, who believes the firm will wait to absorb the previous cut before considering further reductions.
Still, questions loom over the September decision. Bank of America’s team remains cautious, noting no clear signal for September. Lagarde could hint at some data requiring prudence, but the bank would expect such commentary to emphasize that policy moves depend on incoming data and that the path for 2024 will likely face some headwinds. Uriol, however, sees September as the likely window for the next action, a view shared by Ebury. Markets also entertain the idea that rate cuts could cluster in the latter half of 2024, with possibilities centered on September and December.
Pressure on Core Inflation
Ultimately, the policy stance hinges on the evolution of key macro indicators. In just one month, the economic picture has shown little change. Euro area inflation eased to 2.5 percent in June, yet underlying price pressures and service sector inflation remain elevated at 2.9 percent and 4.1 percent respectively. This persistence helps explain the PMI readings, with the composite index slipping from 52.2 to 50.9 as manufacturing activity weakens. Analysts from Ebury note that growth continues at a modest pace while inflation trends downward, but core inflation remains a stubborn problem that sustains uncertainty about the near future.
The continued strength of core price pressures and the unknown trajectory of inflation justify a cautious approach from the ECB. Lagarde herself highlighted, during the June press conference, the importance of high uncertainty for determining the next policy steps. The latest council minutes also reflect ongoing concerns and disagreements among members, underscoring the complexity of reaching a consensus on future rate moves.
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Markets also cast their gaze across the Atlantic, where expectations are firm that the U.S. Federal Reserve will ease rates at the September meeting after holding them at the July gathering. Fed chair Jerome Powell acknowledged progress against inflation in the second quarter, noting three favorable readings that, on average, support a positive pace. Powell cited the June inflation data, which slowed to 3.0 percent year over year, while the core measure rose 3.3 percent for the month, the slowest since April 2021, as a sign of progress rather than a guarantee of rapid change.