Jul
European Central Bank (ECB) policymakers are increasingly speculating that they might only manage to cut interest rates one more time this year, according to sources familiar with the situation. This deliberation comes amid persistent inflation pressures, which are causing officials to grow less certain that two further cuts are feasible. The policymakers are wary of giving investors the impression that a rate cut in September is a foregone conclusion. The sources, who requested anonymity due to the confidentiality of the discussions, shared this concern.
Lessons from June’s Commitment
The policymakers’ previous experience of committing too strongly to a rate cut in June is influencing their current stance. In June, they reduced the ECB’s deposit rate by a quarter point to 3.75% despite a rise in price growth. This prior decision has prompted them to keep all options on the table for the upcoming meeting on September 12. At their most recent gathering on Thursday, rates were held steady.
Lagarde’s Cautionary Tone
These cautious sentiments were echoed by ECB President Christine Lagarde on Thursday. She stated that the outcome of the ECB’s next meeting remains “wide open.” Lagarde reiterated that officials will use “all the data that we will be receiving” to determine their course of action after an eight-week pause between decisions. Her comments underscored the ECB’s commitment to data-driven decision-making in a complex economic environment.
Market Reactions
In response to this news, traders reduced their bets on ECB rate cuts. Markets priced in 44 basis points of easing for the rest of the year, down from around 47 basis points previously. The yield on 10-year German bonds rose by one basis point to 2.43%, and the euro trimmed its earlier losses. These market movements reflect a growing skepticism about the likelihood of multiple rate cuts.
RBI Offloads $406 Million in Bonds Amid Global Index Inclusion-Driven Inflows
India’s central bank, the Reserve Bank of India (RBI), sold 34 billion rupees ($406 million) of bonds in the secondary market during the week ending July 14.
Economic Performance and Inflation Concerns
One argument supporting a rate cut in September is the weak performance of the economy in the second quarter, which might continue to struggle, the sources said. However, services inflation remains stubbornly high, presenting a significant counterargument. This persistent inflation could dissuade policymakers from making another cut, despite economic sluggishness.
Future Possibilities Remain Open
None of the sources ruled out the possibility of two rate cuts still happening, and all emphasized that decisions on any move have yet to be finalized. The discussions during Thursday’s meeting did not specifically address prospects for the September gathering. This indicates that the path forward remains highly uncertain. An ECB spokesperson declined to comment on the officials’ views regarding the future trajectory of interest rates. This maintains the bank’s stance of strategic ambiguity.
As the ECB navigates a challenging economic landscape, the possibility of only one more rate cut in 2024 highlights the balancing act between combating inflation and supporting economic growth. Policymakers’ cautious approach underscores the complexity of their task and the importance of flexibility in their decision-making process. Investors and markets will be closely watching the ECB’s next moves, particularly in the lead-up to the September meeting.
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