Fra Danske Bank:
ECB decided to leave policy rates unchanged at today’s meeting as expected.
Lagarde struck a positive tone in her economic assessment, although ECB still assess the balance of risk to growth as being tilted to the downside. Trade negotiations and data will likely determine whether to end the cutting cycle or not.
We still pencil in a final 25bp cut at the September meeting, although risks are tilted towards a hold due to recent data improvement and positive trade news.
ECB decided as widely expected to leave policy rates unchanged at today’s meeting, and did not provide any significant news compared to the June meeting . Economic data has overall been aligned with expectations, while underlying inflation continues to soften with wage growth coming lower. Today’s statement noted that uncertainty remains ‘exceptionally’ high due to the US-EU trade dispute, making it unnecessary for the central bank to provide any new signals at this point. ECB still consider the risk for growth as tilted to the downside, but Lagarde repeated that monetary policy remains ‘in a good place’. Today’s decision to hold rates was unanimous according to President Lagarde.
Lagarde struck an optimistic tone in her economic assessment. Particularly, she highlighted that the growth surprise in the first quarter of the year was not only due to Irish front-loading of exports to the US but also domestic demand (consumption and investments) being higher than expected. Hence, growth has been developing a little better than expected. She said that the June baseline projections still hold, when asked about the trade rumors of a 15% tariff rate on the EU. We also highlight that today’s services PMI, which rose more than expected to 51.2, is another positive surprise. The weakening of the services sector seen in the past months has been a key argument for a cut in September by the ECB, but this improvement weakens that argument.
As expected, Lagarde abstained from providing any policy signals in terms of the recent strengthening of the euro. ECB is not targeting the exchange rate, but obviously it matters for the inflationary and economic outlook. But unlike previous comments from GC member De Guindos, Lagarde did not provide any clarity on when the euro appreciation will start complicating the current baseline forecast for inflation. Asked about the risk of inflation undershooting, Lagarde referred to ‘three or four’ governors who have expressed such concerns. However, the majority of the GC is not worried of the undershooting projection of inflation averaging 1.6% in 2026.
We continue to project a final cut in September, although we admit that both today’s strengthening of the euro area services PMIs and the progression in US-EU trade talks have increased the likelihood of another hold. However, a lot can happen in the data coming in between now and the September meeting. We think that the combination of softening wage growth and underlying inflation is still likely to trigger a final ‘insurance cut’ – especially if trade uncertainty was to persist beyond August 1, which cannot be ruled out.
The slightly hawkish economic assessment from Lagarde at today’s meeting triggered renewed upward pressure on EUR rates with the front rising 5bp the remarks. Markets are now only discounting rate cuts worth 7bp for September and 19bp by year-end. EUR/USD also rose 0.5% to 1.178 during the press conference.
Hurtige nyheder er stadig i beta-fasen, og fejl kan derfor forekomme.
