ECB cuts rates, signals cautious future moves as inflation pressures ease

On Thursday, the ECB decided to cut interest rates. The deposit rate fell by 0.25 percentage points, from 3.75% to 3.5%. Experts from mBank emphasised in their Friday report that the September meeting of the European Central Bank was exceptional in one respect. It saw the long-anticipated narrowing of the interest rate corridor (between the refinancing and deposit rate). This modification aims to improve monetary policy transmission to the real economy. They emphasise that the rate change itself was not a surprise, but they point out the caution of ECB President Christine Lagarde regarding future decisions.

According to the mBank report, the ECB cut rates in line with previous announcements. As a result, the spread between the deposit rate and the refinancing rate will drop to 0.15 percentage points from 18th September, while the spread between the refinancing rate and the lending rate will remain at 0.25 percentage points. Analysts highlight a significant change in the ECB's communication, noting that "the ECB observed that wage pressure is systematically decreasing, and corporate profits are absorbing the impact of higher wages on inflation."

The mBank report discusses the latest ECB macroeconomic projection in detail. Analysts write that it showed stabilisation of overall inflation (to be precise, revisions were less than 0.1 percentage points) and a marginal increase in the path for core inflation. Experts emphasise that this is not surprising, considering recent data, especially those concerning service inflation.

Regarding the GDP forecast, mBank points out that yearly symbolic downward revisions were made. Details suggest that the main factors lowering growth compared to the previous projection were private consumption and investment. However, analysts note that "according to Lagarde, the situation in this area should improve based on rising incomes and falling inflation."

The report highlights Christine Lagarde's statements during the press conference and her notes regarding weaker growth in unit labour costs in the second quarter despite weaker productivity. In other words, the pace of wage growth reduction is progressing quite briskly. Moreover, Lagarde indicated that the September inflation reading will likely be low (due to base effects) but will rebound in the last quarter.

Based on ECB decisions and statement analysis, mBank experts present forecasts for future central bank actions. A rate cut is expected to not have majority support in October, with the likelihood of such a move being postponed until December. The pace of rate cuts next year should, in turn, speed up somewhat.

The report's authors predict that by late 2025, the deposit rate will likely reach 2%, with minimal potential for further decreases. They also point out that this is significantly higher than before the pandemic, which is related, among other things, to the immense fiscal expenditures that the eurozone/Europe will have to make in the coming years.