ECB won't push back against market pricing

We think that the bar for another rate cut is so high that even a perfectly timed Armand Duplantis vault would struggle to clear it.

The ECB held rates unchanged for the first time in over a year at the last meeting in July, while giving no indication to markets that this would be a one-off. The tone of President Lagarde’s communications was mildly hawkish, in our view.

She underscored the resilience of the economy, which is expected to receive support from the massive fiscal injection in Germany. Policymakers also appear increasingly confident that inflation will land around target in the medium-term.

Developments since the last meeting strengthen our conviction that the ECB will hold rates steady through at least the remainder of the year.

Euro Area inflation continues to remain pinned around the bank’s 2% target and, as of yet at least, price pressures have proven less firm than in the US. The bloc’s economy is also holding up rather well, with resilient domestic demand (propped up by a robust jobs market) and modest growth in business activity providing no reason to panic.”

There are also a number of uncertainties for officials to contend with, and it won’t become clear for a while how these will impact the common bloc’s economy. Perhaps the biggest news of the last few months has been the signing of the US-EU trade deal.

While the details of the deal could have been considerably worse for the bloc, they also could have been a lot better. This will likely have mixed implications for economic activity in the near-term, as the direct impact of the tariffs themselves may be offset by the removal of the uncertainty and the renewed ability of European businesses to plan ahead.

It remains to be seen just how significant a boost the economy will receive from higher spending in Germany, which we don’t expect to be reflected in the data until 2026. Fresh political uncertainty in France amid the expected collapse of the country’s government also provides the bank with little reason to rush. Journalists will no doubt quiz President Lagarde on the turmoil in the country during this week’s press conference.

Yet, the reaction in markets to the turmoil has been relatively calm so far, so we don’t think that there is a pressing need for the Governing Council to intervene. Thursday’s meeting will also see the release of the bank’s latest staff economic projections.

Given the ECB’s increased optimism towards the economy, and the recent surprises to the PMI numbers, we see an upward revision to the 2025 growth forecast as on the cards, even if the lingering uncertainties limit this to only a modest revision.

The bank’s stance on inflation is slightly tougher to call, but a very minor upgrade here is possible given the bank’s more upbeat stance on the economy, which would likely elicit greater price pressures.”

As for Lagarde’s guidance, we think that we’ll see more of the same from the previous meeting in July. She will again likely say that policy is in a “good place”, while hinting that rates will probably stay unchanged for a prolonged period of time.

We don’t think that the ECB will push back against market pricing, and Lagarde will essentially endorse the market’s view that cuts are unlikely at least through the end of the year. Swaps are pricing in around 16bps of cuts by the end of Q1 2026, but we think there is at least as good of a chance of no more cuts at all in the cycle, than there is for one more rate reduction.