EconoFACTS

September 12, 2024 | 10:29

ECB.... Taking it Step by Step, One Data Point at a Time

Economist

Jennifer Lee

Senior Economist and Managing Director
Economics

Jennifer has been wi... (Read more)

Jennifer Lee

Senior Economist and Managing Director
Economics

Jennifer has been wi... (Read more)

For a big announcement today... there wasn't too much excitement surrounding it.

The ECB, as widely expected, lowered its deposit rate by 25 bps to 3.50%, a level last reached in June 2023. This time, the emphasis was on this particular rate which, as President Lagarde put it, "is used to steer the monetary policy stance". And, from now on, the deposit facility rate will be called the DFR. The refi rate and marginal lending rate were both cut by 60 bps to 3.65% and 3.90%, respectively, as the ECB now aims to have a 15 bp spread (was 50) between the DFR and refi rate, and will keep the 25 bp spread between the refi and marginal lending rates.

The ECB staff forecasts for growth were trimmed slightly over the three-year horizon, with risks skewed to the downside given "headwinds". Forecasts for headline CPI were unchanged (will slide below target in 2026), but the core estimates were nudged up for this year and next, on the back of higher services CPI. A resilient labour market (the jobless rate is at a record low 6.4%) has kept wage growth "elevated" and, thus, services costs sticky. That is the component that needs "more attention and understanding and monitoring". However, the central bank expects that wages will cool, eventually, and that profits will continue to "buffer" their impact, all of which will help lower services inflation over the course of 2025.

There was a lot of "this might happen, but that might happen, too", which is understandable given these highly uncertain times. And one can imagine that there is still plenty of disagreement among Council members about how to deal with policy going forward. The decision to cut the deposit rate today was unanimous, but differing views are likely the reason why the ECB head was, once again, non-committal about the next meeting on October 17. The next meeting is only five weeks away, which she called "a relatively short time". President Lagarde also pointed out that "data dependency does not mean data point dependency" and that they're looking at a whole batch of data.

Yes, quite wishy-washy. All decisions are data dependent and will be made on a meeting-by-meeting basis. Despite the consensus view for one more cut this year, we are standing by our "that's it for 2024" call, given stubborn inflation and the tight job market, but admit that given the outlook for growth, risks are skewed to another cut.