Vanguard: ECB will not adjust interest rates this week

Vanguard: ECB will not adjust interest rates this week

15 juli 2024

Rente ECB
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Shaan Raithatha, Investment Strategist at Vanguard, looks ahead to this week's European Central Bank meeting:

The European Central Bank (ECB) is widely expected to remain on hold on Thursday and this meeting is unlikely to bring in major news. That said, there will be updated language on how the outlook for activity and inflation has evolved since June.

Our judgement is that, if anything, a September cut is slightly more likely than six weeks ago. Although inflation moved sideways in annual terms in June, largely due to elevated services inflation, growth momentum disappointed (e.g., see German industrial production and euro area services PMI) and soft U.S. inflation prints now make it more likely the Fed will cut in September.

Ultimately, the pace of easing will depend on the expected trajectory for services inflation, which the ECB believes is primarily driven by wage growth. Compensation per employee grew 5.1% on an annual basis in Q1, which was broadly in line with the ECB’s June forecast. President Lagarde, in Sintra, attributed most of this strength to catch-up effects and one-off payments in Germany, and expects a significant moderation in the coming quarters, in line with survey evidence.

That said, monthly wage surveys have been mixed in the last six weeks, with the Indeed wage tracker reaccelerating but German monthly negotiated wage growth slowing in Q2. Surveys still signal underlying wage growth to slow to under 4% by year-end, which would pave the way for the 2% inflation target to be hit in H1 25.

There are three key pieces of data to watch out for between now and September. The first two are the July and August flash CPI prints. Although key Governing Council members such as Vice President Luis de Guindos have stated inflation will be bumpy in the near-term and this will not deter the ECB from cutting, significant upside surprises to this data, particularly on the services front, could be sufficient to warrant policy remaining on hold until Q4. The third piece of data is the Q2 release on wages, productivity, and corporate profits, which will reveal whether the ECB’s forecasts for unit labour costs are still on track. This is a key piece of evidence for the outlook for services inflation.

In our view, the ECB will back-up its 25-basis point June cut with another one in September and continue to ease on a quarterly basis thereafter. Top of mind is that, by doing nothing, monetary policy becomes increasingly restrictive in real terms as progress on inflation continues.

We still expect underwhelming growth this year (0.8%) amid the dual headwinds of contractionary monetary and fiscal policy, coupled with the lingering effects of the energy crisis on manufacturing industries. Expect core inflation to end the year at 2.6% and hit the 2% target in Q2 25.

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