By Ecofi

After a standstill in July, the European Central Bank (ECB) resumed its rate-cutting drive at its latest meeting. However, the speeches and exchanges with the press gave no indication of the road ahead. The result was a tasteless monetary policy meeting, imprisoned by the concept of “data dependency”. So, what are our expectations for the future?

The ECB therefore lowered rates on September 12, bringing the deposit facility rate to 3.50%. Inflation has been revised slightly upwards, and economic activity downwards. Total inflation is forecast at 2.5% in 2024, 2.2% in 2025 and 1.9% in 2026; core inflation (excluding energy and food) at 2.9% in 2024, 2.3% in 2025 and 2% in 2026. GDP growth is projected at 0.8% for 2024, 1.3% for 2025 and 1.5% for 2026.

The press conference focused mainly on commenting on the latest statistics. Domestic inflation is judged to be high, due in particular to the persistence of the services category and wage increases. While the path of key rates is “rather obvious” according to Christine Lagarde, the ECB remains trapped in its “data-dependent” posture, effectively annihilating any communication on the timing of the next rate cut.

For several months now, we have been calling the ECB’s monetary easing “necessary”. Despite higher figures than we had expected in recent months, inflation is falling on trend. Total inflation is now close to the 2% target. The successive supply shocks inherited from the pandemic and the war in Ukraine have eased, and the recent trend in commodity prices is even exacerbating this phenomenon. Core inflation, on the other hand, has tended to stagnate, leading the ECB to fear that domestic inflation will become more persistent.

However, alternative measures of inflation temper this observation. For example, those that remove extreme variations from the basket of goods and services, or those that focus on items sensitive to changes in economic activity, have been on a downward trend for several months. It should be noted that the latter have anticipated the inflationary surge in 2021, and this time seem to herald a future moderation.

he ECB’s mandate is not to promote economic growth, but its link with inflation is clear. In this respect, the dynamics of private demand in the Eurozone remain poorly oriented. Moreover, this weakness seems to be underestimated by the ECB’s (in our view) over-optimistic forecasts. With the deposit rate at 3.50%, monetary policy is still positioned in restrictive territory, giving the ECB relatively ample room for manoeuvre. We believe that the ECB should take advantage of the window of opportunity offered by the forthcoming meetings to lower rates, before assessing the situation at the turn of Q1 2025, when the European economy, currently “asphyxiated”, will have benefited from this breath of fresh air. The doves seem to be louder these days, but the hawks are still in the majority and the discussions will be bitter, which constitutes a non-negligible risk for our central scenario…

This “dependence on data” can be a strength, if used wisely. In the case of the ECB, however, it is systematically used to justify caution.

It is, of course, easy to be critical of the ECB, far from Frankfurt, its arcana and the stakes that monetary policy decisions represent for the Eurozone. This caution is understandable. However, the risks of falling below the 2% inflation target, of “breaking” European growth at the risk of undermining much-needed productivity gains (cf. the conclusion of Mario Draghi’s report published last week) are all too rarely mentioned by the authorities, who prefer the alternative scenario of persistent inflation…

The next monetary policy meeting is scheduled for October 17…