ECB Poised for September Rate Cut Amid Easing Inflation and Sluggish Growth

European Central Bank policymakers are nearing consensus on a rate cut in September, contingent upon forthcoming data. The ECB had ended an eight-year era of negative rates in July 2022 and implemented an aggressive rate-hike cycle, raising rates by 450 basis points over ten consecutive hikes. In June, the ECB initiated the rate-cutting cycle but paused in July. Currently, the main rates – refinancing, marginal lending, and deposit facility – stand at 4.25%, 4.50%, and 3.75%, respectively.

Although the financial markets widely anticipate another rate cut next month, conscience of previous over-commitments, policymakers remain cautious. Recent data points have led many decision-makers to shift their stances, suggesting that conditions conducive to a rate cut are emerging.

Insiders reveal that ECB policymakers are open to a rate cut in September, citing factors like easing price pressures, underwhelming economic growth, decelerating wage increases, and the Federal Reserve's anticipated rate cut that could simplify the ECB's efforts.

Informal discussions indicate broad support for a September rate cut, though most officials await more data to finalize their positions. The ECB rarely conducts formal votes, with most rate decisions achieved through broad consensus. If even the hawkish anti-cut officials shift their views, significant opposition is unlikely.

ECB President Christine Lagarde's viewpoint will be crucial. However, she has not provided any hints regarding September's decision or made any recent public comments on ECB policy.

Some policymakers worry that a September rate cut may spark market speculation for further cuts in October. They aim to temper investor bets, aligning market pricing with quarterly rate reductions.

Markets currently see a greater than 90% chance of a September rate cut and anticipate at least one more cut this year, with a steady descent through 2025. Policymakers believe that while inflationary pressures are diminishing, rates remain sufficiently high to curb growth; a September cut would suitably ease the brakes.

Nevertheless, concerns about sluggish economic growth persist. Officials must ensure that rates do not excessively suppress growth as achieving a soft economic landing is not a given.