BlackRock: ECB on hold, not on autopilot

Jul 19, 2024

 Ann-Katrin Petersen, Chief Investment Strategist at the BlackRock Investment Institute, comments on yesterday's ECB meeting.

Bottom line: The ECB held rates steady today, as expected, amid upside inflation surprises and downside growth news. We think current highly restrictive rates mean the ECB could cut again in September, but it is not on autopilot and it will depend on forthcoming data. Investors should keep the big picture in mind: This is an atypical rate-cutting cycle. Rates in the euro area will likely stay structurally higher than before the pandemic due to persistent inflationary pressures.

• On hold, not on autopilot. As expected, the ECB held rates steady today, characterising economic activity as slightly softer than expected. We think the ECB will act on forthcoming data and fresh macro projections in September – but it is not on autopilot, with President Lagarde saying a September cut is 'wide open'. She reiterated that the ECB will follow a 'data-dependent, meeting-by-meeting approach'. In line with messaging conveyed at Sintra, the ECB wants more data to confirm its assumed return of inflation to its 2% target by end-2025 and will want to see wage growth moderate further.
• Sticky inflation means policy will stay tight. We don’t think the ECB will cut far and fast. Like its hiking cycle, this not your typical cutting cycle: This is not a return to the world we once knew, where inflation was consistently well below the 2% target. With labour markets still tight and productivity weak, domestic price pressures could keep inflation near or above 2%, even if we think wage growth will come down from current levels. Given the ECB raised rates to highly restrictive levels, a steady pace of rate cuts over coming quarters, including one potentially in September, would still leave policy weighing on growth. That’s even after accounting for what is likely now a higher neutral policy rate due to structural shifts.
• No surprises for markets – for now. Today’s ECB meeting has led markets to somewhat rein in expectations of a September cut. Investors should keep the big picture in mind: rates will likely stay structurally higher than before the pandemic, supporting the appeal of income. We are tactically neutral euro area government bonds as the policy path remains uncertain. We favour U.S. stocks over Europe’s on stronger corporate earnings and the AI theme.