MNI SOURCES: ECB Projections Confirmed So Far, Sept Cut Likely

European Central Bank officials are virtually unanimous that their June projections are so far being confirmed by incoming data, despite ongoing risks from global trade tensions,  paving the way to a likely September cut, though some more cautious policymakers would prefer to wait until December, Eurosystem sources told MNI. 

“Given all the things going on in the world, the debate is quite bland. There is a lack of academic tension.  Everyone by and large is on the same page as we are,” one official said, referring to the atmosphere at the ECB’s annual forum in Sintra, where policymakers concurred in seeing inflation under control barring surprises on July 9, when there is a deadline for a trade deal with the U.S., or from a much stronger appreciation of the euro against the dollar.

However, this broad agreement might not necessarily translate into shared policy action. While several officials told MNI that September is still the likely time for the next rate cut, following an almost-certain pause in July, some might prefer a delayed until December  (See MNI INTERVIEW: ECB Should Stay At 2% If Outlook Holds- Demarco)

 “I think the assumption is that we stand pat in July and then a likely cut in September. That could get pushed back to December, but it’s fairly unlikely,” another official said.

Fears over a possible diversion of Chinese goods away from the U.S. and into Europe have yet to be significantly confirmed, several officials told MNI, opening the way to a benign scenario and a more stable outlook. While risks from U.S. President Donald Trump’s unpredictable trade policy of course continue, these are now better understood.

“I’m less concerned over price threats currently from tariffs, but that could change. A de-escalation of U.S.-China should prevent any large-scale dumping, though there is no doubt some China trade is looking for a more stable path,” an official said.

Having reached the 2% inflation target and with signs of economic recovery, the ECB has some time to take stock, another official said, though warning that all these assumptions could be thrown away by events on July 9 if the U.S. imposes high tariffs. (See MNI INTERVIEW: ECB's Wunsch Sees Downside Growth, Price Risks)

“Anything other than a benign outcome -- and I count an-across-the-board 10% as benign, undesirable, but benign -- will challenge the growth assumptions,” he added.

EXCHANGE RATE

Many Eurosystem officials were however surprised by comments in Sintra by ECB Vice President Luis de Guindos, who said that if the euro kept appreciating above USD1.20 it “would be much more complicated” for the eurozone. While, in interviews with MNI, Bank of Portugal Governor Mario Centeno and acting Bank of Malta Governor Alexander Demarco said euro appreciation could pose problems, other officials told MNI that de Guindos would have been better advised to stick to the mantra that the ECB does not target the exchange rate. (See MNI INTERVIEW: Solid Q2 To Back 1 More Cut- ECB's Centeno)

The ECB will as always take note of how a strong euro could impact transmission of its monetary policy, and the higher it goes against the dollar, the more it will watch for impacts, one official said, noting that current levels aren’t a reason for concern.

“I haven't got the exact level, but current levels are pretty much in line with the lifetime average for euro-dollar, so there’s no real panic,” he added. 

June’s ECB projections assumed a euro exchange rate of only USD1.11 in 2025, rising to USD1.13 for the remainder of the forecast period. The euro has appreciated by almost 14% against the dollar so far this year, and is already trading near USD1.18.

The projections also assumed a value for 2025 of 126.1 on the ECB’s EER41 measure of the euro’s nominal effective exchange rate, which came in at 130.3 on July 1.

An ECB spokesperson declined to comment.