ECB controls inflation again and maintains interest pause (for now). It was the last Portuguese meeting that was heard throughout Europe to ask for cuts to stimulate growth when inflation began to retreat. Comes out at a time when one of the largest economies of the euro arde. Lagarde expects Paris to comply with the budget rules.
The European Central Bank (ECB) has lost its largest ‘dove’, that is, the defender of a more expansionary monetary policy (DoVish), with lower interest rates. It was the last meeting of Mario Centeno to represent Portugal at the headquarters of the ECB in Frankfurt. Now Italian Fabio Panetta and the Greek Yannis Stounras are leading the ranking of governors considered more Dovish.
The departure of the governor of Banco de Portugal occurs when the cycle of interest cuts and inflation is controlled. Timing is a coincidence, of course, but it is still the best possible time in recent years to leave Frankfurt. On the other hand, the second largest economy of the euro is under pressure, France.
In January 2024, Márioenteno was defending interest cuts to stimulate the eurozone economy. At the time, the ECB left the rates unchanged for the third consecutive meeting, after 10 consecutive interest rates, to a record level of 4% at the rate of deposits (2% now). But it would be needing to wait until June 2024 for the ECB to start with the descent cycle. It was difficult to start, but culminated in eight cuts within a year.
On the side of the ‘hawks’, Slovak Peter Kazimir, Germans Isabel Schnabel and Joachim Nagel, Dutchman Olaf Sleijpen or Austrian Martin Kocher (who recently replaced Ultra-Falcão Robert Holzmann) who defend a more restrictive monetary policy (Hawkish), according to the ranking of “Econostream”.
It is now left to know how Álvaro Santos Pereira will be positioned. Your first meeting in Frankfurt will take place on October 30, where you will have voting rights.
The hot theme of France
At the meeting of Thursday, the hot theme was the situation of France. The president of the ECB well started by saying that she would not comment individually about countries, but could not resist leaving several alerts to Paris.
“I am confident that political decision makers can reduce uncertainty,” he began to say in the usual press conference where he explains the central bank’s decisions.
It also mentioned the importance of complying with European budgetary rules. “I am sure all governments want to operate based on this budget frame,” he said.
Asked if the ECB planned to work in the market to buy Gaulo debt and cool interest rates, he replied that the “Eurozone obligations are working well and with good liquidity”.
“Our focus is on price stability, but we need financial stability, which requires a monetary transmission mechanism to work well. We have all the necessary tools if this transmission does not prove enough throughout the eurozone,” according to Christine Lagarde.
The ECB announced a break in the interest rates for the second consecutive meeting, and the suspension is to continue. “The misinflation process is over,” said the ECB leader. The euro zone is in a “good position”, with inflation to be (2%) where the PCE predicted. “Inflation is currently around 2% and the council of governors maintains its prediction of unchanged inflation,” according to Frankfurt’s statement.
Growth of the eurozone reviewed high
The new ECB projections are in line with the previous ones, presented in June. Inflation of 2.1% in 2025, 1.7% in 2026 and 1.9% in 2027. Removing power and energy, average inflation should reach 2.4% in 2025, 1.9% in 2026 and 1.8% in 2027.
The economy of the eurozone is expected to grow 1.2% by 2025, a revision up to June (0.9%). The projection for 2026 descended, 1.0%, with the projection for 2027 to remain unchanged by 1.3%.
“The board is determined to ensure that inflation stabilizes in the 2% target in the medium term,” according to the statement that ensures that the next decisions will be “data dependent” and “meeting to meet” to determine the “most appropriate monetary policy”.
ECB council decisions “will be made based on the inflation’s Outlook assessment and risks in the light of financial and economic data, as well as underlying inflation dynamics and the force of monetary policy transmission. The council is not committed to any particular rates.”
Analysts consider that the cycle of interest rates of the ECB interest rates has ended for now.
Obsce “is on the wall – which is not particularly comfortable, but it is preferable to fall on the wrong side. Inflation remains high, while growth is resilient enough,” said Roelof Salomons from Blackrock.
“Another cut this year seems unlikely. (…) Markets are still pricing that the ECB will remain at 2% by the end of the year, and the obstacle to another cut is quite high,” he said.
For Ebury’s Michał Jóźwiak analyst, “another interest rate reduction is no longer the base scenario, with markets attributing less than one in five hypotheses of happening in 2025.”
The analyst considers that the cycle of cuts “ended” unless it is proved that US tariffs “are having a very significant impact on the eurozone economy to consider greater flexibility. We consider it unlikely, especially given that Germany’s huge fiscal stimulus program is expected to boost growth next year”.
End of relief or pause?
Already Luke Bartholomew from Aberdeen wrote that the most urgent theme is whether the ECB “ended the relief or is pausing briefly before making more cuts in the future”, with economic predictions pointing out that the cuts ended.
In the future, the next ECB mox can even be an increase in the rate and not a cut, estimates.
For Carsten Brzeski from the Dutch Bank Ing, there are still risks descendant for inflation, which leaves the “door open to another cut.” Although the “goal for another cut is very high, we cannot exclude from all that the ECB is forced” to act “in the coming months.”
“There are valid arguments that can force the Central Bank to cut in the coming months,” such as the US trade agreement, whose expected rates may be higher if certain points are not met, or inflation below 2%.
In turn, Irene Lauro da Schroders considers that the relief cycle ended. “With commercial uncertainty to retreat, the recovery of the eurozone will accelerate,” with the help of the German Stimulus Program and unemployment at minimum levels.
The big risk now is political uncertainty, with France on the radar, but the resilience of the economy and with strong internal demand, the ECB “can afford to keep monetary policy unchanged,” he concluded.
