European Central Bank may leave rates unchanged until December

ISTANBUL

The European Central Bank (ECB) may leave its rates unchanged at its September meeting, taking up a “wait-and-see” approach, while experts expect the bank to cut rates in December.

The ECB, as per market estimates, will most likely keep interest rates unchanged next week, with all eyes on ECB President Christine Lagarde’s verbal guidance on the region’s economic activity.

Lagarde’s hawkish stance in July decreased the estimates of further action in that month. The recent US–EU trade agreement and signs of recovery in the eurozone fueled the previously waning expectations.

Peter Vanden Houte, chief economist at the ING Group, told Anadolu that the bar for another rate cut is “high” after the minutes of the July meeting and ECB officials’ statements.

“Several more favorable developments over the summer have strengthened the wait-and-see stance: the ‘it-could-have-been-worse’ trade agreement between the US and the EU, a decent second quarter GDP growth reading, and still-improving business sentiment indicators, which have strengthened rather than weakened the case for staying on hold at the September meeting,” he said.

Houte said a small and surprising increase in headline inflation in the last month contributed to the estimates of a wait-and-see approach by the ECB.

"We now think that the ECB will likely keep rates at current levels for the foreseeable future," he said, adding that an additional rate cut is only possible if the recovery falters or if French political turmoil causes eurozone-wide stress on financial markets.

Hadrien Camatte, senior economist for France, Belgium, and the eurozone at Natixis, told Anadolu that the ECB may have postponed rate cuts until December amid rising uncertainty.

“The ECB will unveil its new set of forecasts. We expect slight upward revisions regarding GDP growth for 2025 and 2026,” he said. “We believe that a final 25bp rate cut in December is still possible in case labor market softening appears more severe than expected, and inflation drops well below target due to decreasing energy prices and stronger appreciation of the euro.”

Bas van Geffen, senior macro strategist at Rabobank, told Anadolu that the doves “don’t have a solid case for another rate cut, as some hawks are starting to think about the future need for rate hikes already.”

“The French political turmoil and the rise in global ultra-long rates do not warrant a policy response at this juncture,” he noted.