MNI SOURCES: Data-Led ECB To Hold A Cut In Reserve If Needed

The European Central Bank is trying to determine whether it has reached the bottom of its easing cycle, but could still cut the deposit rate in the coming months if data shows a return of economic weakness or suggests a greater-than-expected inflation undershoot, Eurosystem sources told MNI.

While a further cut from the current 2.0% is now seen as unlikely at next week’s Governing Council meeting, the risk bias among policymakers remains cautiously to the downside as they maintain a data-dependent, meeting-by-meeting approach, with eurozone inflation already around the 2% target and likely to weaken, officials said.

“We already see an [inflation] undershoot in 2026 on the June rate path and that gives us the room to cut once more if needed,” said one official, adding that a September hold was probable barring a surprise in the quarterly projections. “But whether we use that as an insurance cut, or keep it in reserve for later in the year or even hold here for an extended period to observe where the chips land in coming months, I'm not sure there is currently a clear consensus, although the risk bias certainly sits with one more cut.”

Price and growth pressures remain to the downside, unless there is a surprise and Germany heavily front-loads its fiscal boost, the source said.

U.S. TRADE DEAL

Eurozone growth and PMI data has been firm since the last ECB meeting, while a preliminary trade deal with the U.S. reduced the likelihood of a serious trade conflict with Washington, even if it still left European firms set to face major tariffs. 

“The trade outcome was largely in line with the upper-end best case scenario, although certainly not better than expected in any field. PMIs are steady and actual growth numbers are a little better than expected, but it is hard to discern the extent of front-loading ahead of tariff deadlines,” another official said. (See MNI: U.S. Tariffs Seen Hitting Italy Exports, GDP, From 2026)

More than one source noted how better-than-expected first-half data may have been distorted by a rush by exporters to make shipments before U.S. tariffs took effect.

“We need to understand whether the positive signals from the first quarter were just frontloading or there was something more. Unfortunately, we won't have enough to know in September. But the confidence indices seem to be improving,” another official said. There does not appear to be a majority on the Council for a September cut, the source said, unless the projections point to clear trouble ahead. (See MNI SOURCES: Markets Overplaying ECB's Hawkish Shift)

“You can always wait until October or December. I don't believe in the idea that the later in the year the more difficult it is. We don't work that way,” the official said.

Another official agreed, noting that 2028 projections would also be available by December.

FISCAL FEARS

The meeting will take place only days after a confidence vote likely to result in the fall of French Prime Minister Francois Bayrou, potentially ushering in a new government and calling France’s fiscal consolidation into question. While the ECB would be widely expected by investors to respond to any dangerous bond market selloff, perhaps by means of its Transmission Protection Instrument, loosening fiscal discipline around the single currency bloc is a complicating factor for monetary policy.

“I’d be concerned by the collapse of fiscal commitment in countries like France or Belgium, and even Germany. In such a context, I find it hard to imagine surprising markets with a cut because this could signal a mild form of fiscal dominance,” one official said, though he stressed that this was a personal view.

An ECB spokesperson declined to comment.