MNI SOURCES: ECB In 'Wait And See' Mode, Risks Still Tilt Down

The European Central Bank is in “wait and see” mode, with policymakers happy with current interest rates but leaving the door open to an additional cut, given inflation and growth risks seen as broadly balanced but still tilted to the downside, Eurosystem sources told MNI.

While some officials have expressed concerns about upside risks to inflation, renewed questions over trade with the U.S. and China and a slower-than-expected increase in fiscal spending are feeding uncertainty around growth, with particular concerns over Germany.

“Personally, I'm more in the 'risk of one more' camp -- and I think that is still a substantive block on the GC,” one source said. ”Risks are still to the downside, albeit more balanced -- 'more balanced', not ‘balanced.’” 

Another source pointed to weaker industrial production over the summer and the potential impact of Chinese restrictions on rare earth exports. Trade seems to have slowed everywhere, and not just EU exports to the U.S., a source noted.

While officials see no chance of a move in October, December’s meeting will provide the ECB’s first inflation projection for 2028. In the absence of major shocks, any change in rates is likely to come during meetings that include new staff projections, officials noted, with one saying that if December’s show a continuing undershoot of the inflation target, “a very strong debate to further cut is very much on the table.” (See MNI INTERVIEW: ECB's Wunsch Sees Less Chance Of Another Cut)

SYMMETRY

A source from another national central bank agreed.

“I am not telling you anything new if I say that if inflation for 2026, 2027 and 2028 is below 2%, the cut is almost certain,” the source said.

Others however observed that the final year of the projection period tend to converge to the 2% target.

"One would hope that the end-2028 projection is at 2% – I know some people would say it is a determinist number that is always hit – but I would argue that that is a symptom of policymaking and projections in that we set policy to hit 2% over that time frame, so it should be at 2%, all things being equal,” one said.

The ECB’s more dovish camp will stress the symmetric nature of the ECB 2% inflation target, with one official telling MNI that symmetry should mean that two consecutive years of inflation below 2% would argue for a cut.

“I know the president has said minor deviations will be looked through, but if a minor deviation is in the projections for a large part of the medium-term horizon, people can be forgiven for thinking there has been a slippage into the old 'close to, but below 2%’ target,” one of the sources said.

ETS2

The ECB’s September projections anticipated inflation of 1.9% for 2027, including an impact of some tenths of a percentage point from the EU’s planned new ETS2 carbon trading system. Any delay or dilution of ETS2 could have a material impact on the path of inflation, but policymakers cautioned against viewing this as the sole argument for further easing. (See MNI SOURCES: Doubts Over EU Carbon Pricing Key For ECB Rates)

“I still see the greater balance of risks to the downside on both growth and prices. On inflation, even leaving ETS2 out of the equation for now, there is a growing risk of undershoot,” another source said. 

One policymaker warned that the window for another cut may narrow if the ECB does not act soon, though others disagreed.

 “A cut is more likely, but if there is no move between now and March, then we can say the cycle is closed,” the first source said.

However, another official noted that this would not fit with the ECB’s current meeting-by-meeting approach.

“We remain data dependent and that may well mean we are on hold for an extended period or there is another cut,” the source said. “But let's be clear, a cut could easily be envisaged over coming months, even if it's not someone's base case. A next move as a hike is not even in the policy thinking, let alone discussion, at the moment.”

An ECB spokesperson declined to comment.