ECB Set to Deliver a September Rate Cut

Image © European Central Bank, reproduced under CC licensing

The European Central Bank (ECB) just delivered its July policy update, keeping interest rates unchanged, as expected. The guidance is consistent with the next rate cut falling in September.

The ECB lowered the main policy rates by 25 basis points in June and a follow-up cut in July always looked a stretch due to proximity and a steady set of Eurozone economic data releases.

Market odds are firmly pinned on the second cut of the cycle falling in September.

"Policymakers sought not to 'rock the boat' before the annual summer break, though remain primed to deliver the next cut of the cycle in 8 weeks' time," says Michael Brown, Senior Research Strategist at Pepperstone.

The focus of the July meeting was always likely to fall on the guidance as investors searched for clues on the timing of the next cut.

Unchanged euro exchange rates and steady Eurozone bond yields betray relatively unchanged guidance from the ECB that leans heavily on the ECB's desire to monitor data before committing to further interest rate changes.

September will see the ECB release its next set of economic projections, which are expected to show a series of inflation downgrades.

Economists think this can provide the required cover to deliver a further 25 basis points of monetary easing.

"A 25bp cut at each of the September and December meetings remains the base case, and a policy path which money markets almost fully price," says Brown.