ECB to leave the door open for September rate cut

So the focus during Thursday's meeting will very much be on signalling for moves at upcoming meetings. At the June Governing Council meeting, when the ECB first cut rates, President Lagarde seemed to suggest that the ECB would decide ‘much later in the summer’ on the next move. This seemed to be confirmed by Klaas Knot, Governor of the Dutch central bank, who said recently that the September meeting will be the first that will be ‘truly open’. Although with monetary policy restrictive, disinflation well underway and the economy sluggish, the environment seems primed for rate cuts, the Council has some lingering concerns, which are leading to caution. In particular, domestic inflationary pressures are still elevated, with both wage growth –and as a result– services inflation still quite high. Having said that, leading indicators are pointing in the direction of slower wage growth and the ECB would like to be more confident that such a turn is in train. Against this background, we would not expect any explicit guidance of a September rate cut. Rather, a soft guidance, signally that September is a possibility. At a time of writing, markets are pricing in an 80% chance of a rate reduction in September, so guidance hinting at such a step should not make much of a splash.