ECB Interest Rate Prep
On Thursday the 24th of July at 08:15 ET, the ECB is set to release the results of their latest monetary policy meeting.
Here are some views on what to expect.
Commentary
Wells Fargo
Next week’s European Central Bank (ECB) meeting and the release of July PMIs will be closely watched for signals on the Eurozone’s economic and monetary policy trajectory. The ECB is widely expected to keep its Deposit Rate unchanged at 2.00% amid an uncertain global backdrop. June inflation data showed headline inflation at 2.0% year-over-year, with core inflation steady at 2.3%. However, services inflation edged up to 3.3%.
Despite the pause, we believe the ECB is not yet done easing. Policymakers have emphasized a data-dependent approach, and we continue to expect a final 25 bps rate cut by September, which would bring the Deposit Rate to 1.75%. President Trump recently threatened to impose a 30% tariff on EU goods starting Aug. 1, but with negotiations still under way and a previous pattern of walking back or delaying the implementation of tariffs, there’s still some expectation that the final tariff rate could be scaled back. As a result, there is little urgency for the ECB to respond with a rate cut at its July meeting. Still, the ECB’s “good place” could increasingly be at risk from renewed trade frictions, a stronger euro and persistent geopolitical tensions in Ukraine and the Middle East.
Meanwhile, July’s flash PMIs will offer a timely read on the region’s growth momentum. June’s composite PMI came in at 50.6, with manufacturing at 49.5 and services at 50.5. Consensus expectations for July point to modest improvements: Manufacturing is seen rising to 49.8, services to 50.7 and the composite index to 50.8, with Germany’s manufacturing sector expected to lead the gains. While these figures suggest tentative stabilization, global uncertainties and unpredictable trade policies continue to weigh on sentiment and supply chains, which further reinforces the case for a cautious and flexible ECB.
ANZ
We expect no cut in policy rates at this week’s European Central Bank (ECB) meeting, but we do expect the ECB will maintain an easing bias amid elevated economic and tariff uncertainty. We see one more 25bp rate cut in this cycle (September) before the benchmark deposit facility rate troughs at 1.75%. ECB policy rates are no longer restrictive, and the 200bp reduction in rates over the past 12 months to 2.0% will provide underlying support to economic activity in coming quarters. Euro area (EA) inflation has fallen sustainably to target, averaging 2.06% y/y over the four months to June. Core inflation is also moving towards target and has averaged 2.3% y/y in recent months except the Easter bump in April. Moderating services inflation (June 3.3% y/y) has underpinned this progress, sticky service price inflation has subsided and supercore
inflation has moderated. Subsiding wage growth, well anchored medium-term inflation expectations (2.4%) and normalised supply-chains all support a stable inflation backdrop.
We remain relatively constructive on the EA’s growth outlook. At 6.3%, the unemployment rate is just above its record low (6.2%) and the labour market is expected to continue growing. The ECB forecasts the unemployment rate will fall gradually to 6.0% in 2027. Employment expectations in the service sector have improved modestly over the past four months and are little changed in the manufacturing sector. Rising real wages and employment provide a positive backdrop to private consumption. Lower interest rates are encouraging a higher marginal propensity to consume. Fiscal policy is turning expansionary helped by rising public expenditure in Germany and plans for higher defence spending across Europe. Modest growth in business investment, recovering mortgage growth and a gradual firming in consumer credit demand are all by-products of lower interest rates.
Unicredit
On Thursday, the ECB will almost certainly leave interest rates unchanged. It would be the first pause after seven consecutive cuts. At the June meeting, Lagarde prepared the ground for a pause by signalling that the easing cycle was drawing to a close and that monetary policy is in a good position to navigate current uncertainties. We think a decision to maintain current rates will be uncontroversial, as most of the Governing Council (GC) will likely see the merit in waiting for more clarity with regard to the trade outlook before considering any further adjustment to monetary policy. With the European Commission engaged in high-stakes negotiations with the Trump administration, such clarity is unlikely to emerge by Thursday.
In light of recent events, the risk of an adverse tariff scenario has increased since the June ECB meeting. The 30% tariff on EU goods threatened by the US is much higher than generally expected, including by the ECB, which in its forecasting exercise last month assumed a 10% tariff in its baseline scenario and 20% in its adverse scenario. However, the response of financial markets to US President Donald Trump’s letter to the EU has been muted, and this seems to reflect expectations that the landing point for tariffs on EU goods will be materially below 30%. In this environment, and given that indicators of sentiment, economic activity and the labour market in the eurozone have been holding up reasonably well, the ECB can afford to wait and see what the outcome of trade negotiations will be.
The ECB’s rhetoric on the exchange rate will be closely scrutinised by financial markets. The euro has risen above levels prevailing at the time of the June ECB meeting (both relative to the USD and in trade-weighted terms) and is now 2-3% stronger than the central bank had assumed in its latest round of macroeconomic forecasts. This is not a lot, but given that the ECB’s projections already envisage inflation being below 2% throughout next year, we suspect that the GC regards recent euro strength as undesirable, particularly because it reflects exogenous factors, such as the loss in appeal of the USD due to Trump’s policies. Therefore, Lagarde will likely tread carefully during the Q&A and we expect her to deliver a broadly balanced message: that one should not panic about euro strength but that the ECB is not giving a green light to further appreciation either.
Overall, we do not expect to receive any meaningful directional signals from Lagarde this week. The ECB will likely stick to its data-dependent approach, and the door will remain open for further easing. The next live meeting will be on 11 September, when a new set of macroeconomic forecasts will have hopefully provided the GC with a more-reliable assessment of the impact of the trade war on eurozone growth and inflation. We confirm our expectation for a final 25bp rate cut at that meeting, as we think that downside risks to activity will prevail over upside risks to inflation. However, this is a close call because the GC is likely to be split over the need for further easing. ECB Executive Board member Isabel Schnabel, an influential hawk, has already staked out a position, by stating that the bar for another cut is very high, while doves have generally remained vague. Barring major upside surprises to incoming data, we expect them to become more vocal after the summer break.
Neither eurozone rates nor the EUR are likely to be significantly impacted by the ECB remaining on hold, as a pause in easing was anticipated by ECB President Christine Lagarde in June. Against this backdrop, the ECB’s openness to a cut after summer might support govies following their recent sell-off. EUR-USD will likely keep struggling below 1.17, with focus remaining on developments in US-EU tariff negotiations.
