Europe eases again

September 12, 2024

The European Central Bank (ECB) voted to decrease its key short-term rate by one-quarter point to 3.5% in a unanimous decision. This was the second rate cut of the cycle, following an initial cut in June.

The ECB’s single mandate for price stability puts inflation center stage. Its forecasts have remained steady with inflation expected to return to a 2% target during the second half of next year.

European Union (EU) inflation has been in decline for almost two years. Services inflation has proven sticky and now accounts for nearly three-quarters of inflation across the Eurozone. Inflation-adjusted wages recently rose at the fastest pace in the Eurozone’s 25-year history. Upcoming contract negotiations could cause wage gains to be high due to the nature of the process. However, the ECB’s expectations for slowing wage growth, lower corporate profits and increasing productivity provide optimism that services inflation should moderate next year.

ECB President Christine Lagarde was adamant in the press conference following the meeting, saying the bank will “continue to follow a data dependent and meeting-by-meeting approach… we are not pre-committing to a particular rate path.” She repeated this refrain several times. The majority of Governing Council members are inflation hawks who will likely want to see progress on services inflation prior to another cut.

Policy has been restrictive enough for President Lagarde to remark that “the footprint of our monetary policy in the real economy has been visible.” Credit growth is weak; household consumption remains muted even with higher wages.

The EU avoided a technical recession to close out 2023, but 2024 growth has been poor. The bloc’s economy grew 0.2% in the second quarter, a tick lower than the 0.3% growth of the first quarter driven by net exports and government spending. Private demand and household consumption were drags on the European economy.

The ECB remains data dependent, which is vastly different from data-point dependent. It is looking for sustained progress on inflation, not just a good month driven by energy price declines. With inflation in decline and growth set to rise in 2025 and 2026, the ECB is likely to hold rates flat at the October meeting and conduct another one-quarter point cut in December.