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Europe | Monetary Policy & Inflation | Rates
Europe | Monetary Policy & Inflation | Rates
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Short of a seismic non-data surprise, the ECB will almost certainly cut interest rates by 25bps at their 17 October meeting. While ECB hawks, such as Nagel and Kazaks, have come round to an October easing, there has been little backing for a 50bp cut (gradualism remains a key talking point; even dove Centeno is against ‘big steps’). See here for our summary of recent comments.
Forecasts will remain unchanged at the 17 October meeting. As such, while September inflation decently undershot their September projections (more on that below), we expect the Governing Council will be cautious taking too much comfort from this.
We warned that 2024/25 ECB pricing was too dovish – down to 1.7% by end-2025. It has since pared to a more reasonable 2%, in reaction to the September NFP (Chart 1). Even so, four cuts at the next four meetings may still be too far if inflation reaccelerated in Q1 2025, or if the labour market remains strong.
September’s flash Eurozone inflation decently undershot ECB forecasts (Chart 2). That headline, core and services all felt the weakness suggests core services may have driven the move – accommodation prices have shown strong seasonality recently and could be a driver.
We are wary that the pattern of MoM core inflation moves is similar to 2023. Then, August (SA) came close to typical, September undershot, and October ticked back up. Similarly, wage-intensive services inflation momentum slowed through to the end of the year but picked back up in the next (Chart 3).
A similar pattern should be a concern for the EZ on the risk that inflation pressures pick back up in early 2025 (when many companies revise pricing), as they did in 2024.
While inflation is undershooting ECB projections, the labour market remains stronger than forecast, driven by employment growth (Charts 4 and 5). The ECB had to improve near-term forecasts for the labour market in September, but it retains a more bearish outlook further out – these may need to be revised higher if something does not give soon. Also, notably, surveys have consistently underestimated employment growth since 2022 (Chart A5).
Poor economic growth has been a strong theme lately. There are several important factors to this:
Point 3 is important. The ECB already downgraded productivity expectations in September. If this continues, it will provide further upward pressure to the medium-term inflation outlook.
Overall, surveys paint a relatively bearish picture, with inflation expectations re-anchoring and continued wage growth slowing ahead (Charts A2, A3, A6). However, both output and employment surveys since 2022 have tended to be more bearish than hard data (Charts A4, A5).
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