A growing number of European Central Bank policymakers are indicating their support for another interest rate cut in September, with only significant data surprises potentially delaying the move. While financial markets are already anticipating a rate cut next month, policymakers have been cautious in their public statements following criticism after the central bank’s first rate cut in June. Recent figures on growth, wages, and prices have swayed policymakers, with many open to discussing the possibility of a September cut as conditions for a rate cut are being met.
Sources familiar with the discussions suggest that there is broad support among policymakers for a rate cut on September 12th. Arguments for the cut include easing price pressures, weaker economic growth, softening wage growth, and signals from the U.S. Federal Reserve about its own easing policies. Given the consensus-based decision-making process at the ECB, if policy hawks are already aligning with a September cut, it is unlikely to be a contentious decision. However, ECB President Christine Lagarde has not made any public comments on the September decision yet, and formal discussions have not begun.
European Central Bank policymakers are also concerned about managing expectations for future rate cuts, particularly in October. Some fear that a September cut could lead to expectations for further cuts, which they aim to avoid to keep market pricing consistent with quarterly cuts. Market expectations currently indicate a high likelihood of a September cut and forecast at least one more cut by the end of the year. Communicating the decision may be more challenging than the decision itself, as policymakers aim to balance market expectations and avoid encouraging speculation.
The chief argument supporting a rate cut is that easing was already anticipated when inflation was following the ECB’s predicted path. While inflation has increased slightly over the summer, softening wage pressures and corporate profits absorbing wage increases suggest that underlying price pressures are easing. Policymakers believe that interest rates are still high enough to restrict growth, and a rate cut would be a way to alleviate some of the pressure on the economy. Concerns about lacklustre growth, particularly in Germany, the euro zone’s largest economy, are also driving support for a rate cut to prevent further economic slowdown.
Ultimately, ECB policymakers agree that the central bank cannot afford to further delay reaching its 2% inflation target. The current projection sees inflation reaching the target in late 2025, and there is a consensus among policymakers to avoid letting this target slip into 2026. Preserving credibility and meeting the inflation target is crucial, and policymakers are determined to achieve this goal by next year unless unforeseen shocks to the economy require a different approach. The decision on a rate cut in September will be crucial for the ECB as it navigates economic challenges and aims to stimulate growth in the euro zone.
