ECB expected to cut rates after August inflation data By Investing.com

On Friday, economists from Evercore ISI provided insights into the European Central Bank’s (ECB) potential actions following the release of August’s eurozone inflation data. The data showed a headline inflation decrease to 2.2 percent, down by approximately 0.4 percentage points, primarily due to the impact of falling energy prices.

Core inflation also saw a reduction by 0.1 percentage points to 2.8 percent, influenced by a slowdown in goods inflation. However, services inflation remained high at 4.2 percent, indicating that domestically-generated inflation has not begun a consistent downward trend.

The economists noted that the stubbornly high services inflation, combined with weak productivity, ongoing wage dynamics, and geopolitical and trade uncertainties, could be seen by the ECB’s hawks as significant upside risks to inflation. These factors may warrant further evidence before deciding on another rate cut after September.

On the other hand, doves within the ECB might argue for an accelerated pace of monetary easing, citing one-off factors such as the Olympics, a deceleration in negotiated wages, and a deteriorating growth outlook as justification.

Additional factors influencing the ECB’s decision-making include the shift in the Federal Reserve’s rate outlook, the consequent appreciation of the euro, and reduced demand from China, all of which heighten the downside risks to eurozone growth and inflation.

The economists expressed concern that the ECB could lag in its response, potentially leading to labor market issues or inflation falling below target.

Despite a possible slight decrease in services inflation in September, the majority of the ECB Council may view this as an isolated data point, not enough to confirm a downward trend in services inflation or to warrant an October rate cut. The recent speech by ECB executive board member Isabel Schnabel was highlighted as being particularly pertinent to the rate outlook.

Schnabel acknowledged potential inflation risks but also noted recent data supporting expectations of inflation returning to 2 percent by the end of 2025. She advocated for a gradual reduction in policy rates but urged caution as rates approach the estimated neutral interest rate, which is around 3 percent in nominal terms.

In conclusion, Evercore ISI’s base case remains that the ECB will proceed with a rate cut in September but is likely to forgo a cut in October.

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