While the ECB seemed to have ruled out a rate cut in October during the last Council on September 12 – notably by revising upwards its underlying inflation forecasts in 2024 and 2025, despite downward revisions on growth – the “little phrase
» by Ch. Lagarde during his speech yesterday to the European Parliament opens the door for a further reduction in the restrictive nature of monetary policy on October 17.
Maryse Pogodzinski economist Maryse POGODZINSKI,
economist at Groupama AM
“Looking ahead, inflation might temporarily increase in the fourth quarter of this year as previous sharp falls in energy prices drop out of the annual rates, butthe latest developments strengthen our confidence that inflation will return to target in a timely manner . We will take that into account in our next monetary policy meeting in October
”.
Speech by Ch. Lagarde during the hearing of the Economic and Monetary Affairs Committee of the European Parliament, September 30, 2024. If the ECB decided to reduce its rates by 25bp at the next Council on October 17, this would mean, in our opinion, that the ECB wishes to use the “firing window” offered by the latest inflation figures.Factually, the inflation figures for Q3-2024 are 1/10th lower than expected by the ECB in the latest projections published in September, i.e. at 2.8% year-on-year versus 2.9% for underlying inflation and 2.2 % versus 2.3% for overall inflation; these data on inflation should be associated with disappointing business climate surveys in September and cited by Ch. Lagarde “Looking ahead, the suppressed level of some survey indicators suggests that the recovery is facing headwinds
”.
The ECB could opt for a “risk management” mode and decide to reduce its key rates again by 25bp in October and similarly, depending on the data, decide not to act in December.
Our scenario:
Given our growth and inflation scenario, market expectations of key rate cuts still seem too aggressive to us. That said, the remarks of the President of the ECB during her speech before the European Parliament leave the door open to an “adjustable” timetable. Furthermore, we cannot rule out some pressure coming from the other side of the Atlantic if the Fed lowered its rates twice again by 25bp in November and December. We are moving our schedule forward by one quarter by introducing a 25bp cut in Q4-24, rather in October than in December; we still maintain 2 cuts in 2025, leaving the deposit rate at 2.75% at the end of 2025, which is at this stage our terminal rate.
ECB key rate graph Groupama AM
Par Maryse POGODZINSKI, Economiste
Screenshot 2024 01 04 160050
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