ECB Gears Up for Next Interest Rate Cut With Inflation Slowing

(Bloomberg) -- European Central Bank officials talking up the prospect of another reduction in interest rates next month will take heart from forecasts suggesting inflation is plummeting back toward their target.

Nine members of the ECB’s rate-setting Governing Council are attending the Federal Reserve’s annual get-together in Jackson Hole this week, with several already making the case to further loosen monetary policy on Sept. 12.

Such arguments are made easier by an inflation rate that economists surveyed by Bloomberg reckon will slump to 2.2% this month, having wrong-footed them in July by edging up to 2.6%. That rosy outlook even includes a long-awaited dip in underlying price pressures, which have been lodged at 2.9% for three months.

Money markets are now betting on two more quarter-point rate cuts this year — starting next month — with a 60% chance of a third. That would lower the deposit rate to 3%.

What Bloomberg Economics Says...

“Euro-area inflation may ease close to the ECB’s 2% target in August. Yet, sticky core and services price pressures will keep policymakers cautious, maintaining a gradual, quarterly path for rate cuts ahead.”

—Jamie Rush, Maeva Cousin and Ana Andrade, economists. Click here for full report  

Of course, it’s not just headline inflation that will determine what President Christine Lagarde has described as a “data-driven” meeting in September. The ECB remains focused on the interplay between wages, productivity and corporate profits.

And while productivity figures may have disappointed, this week delivered a big boost in the form of negotiated pay slowing markedly in second quarter, to 3.6% from 4.7%.

“Given the data we have at the moment, I would be very much open for a discussion of yet another rate cut in September,” hawkish Latvian central bank chief Martins Kazaks told Bloomberg Television.

Federal Reserve Chair Jerome Powell added to the sense that inflation is on the back foot by saying that “the time has come” for US borrowing costs to be lowered.

ECB Officials in Jackson Hole

For Europe, there’s also the economy. Policymakers seem more concerned about growth, which — despite getting a shot in the arm from the Paris Olympics, according to this week’s Purchasing Managers’ Index — is stumbling after a strong first half of the year.

Euro-zone unemployment has ticked up, while consumer sentiment has unexpectedly dipped. In Germany — the source of much of the region’s woes — gross domestic product surprised analysts in the second quarter by shrinking, underscoring its enduring industrial weakness. Confidence within the country is fading. 

For Mario Centeno, the head of Portugal’s central bank, the labor market is a key concern as economic expansion fizzles out.

“The gamble is will employment hold in the context of a stagnant economy or not,” he said. “There has been quite a bit of a sacrifice in Europe to bring inflation down. Even in this soft-landing story, we don’t grow.” 

--With assistance from Joao Lima, James Hirai and Joel Rinneby.

(Updates with Fed’s Powell, ECB’s Rehn starting in eighth paragraph.)

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