Cautious Stance on Interest Rates
The market widely anticipates that the European Central Bank will keep the deposit facility rate unchanged at 2% in the upcoming decision. Following consecutive rate cuts in previous months, officials have increasingly adopted a cautious attitude, believing it necessary to assess the effectiveness of policy transmission rather than taking further action immediately. Some members are concerned that excessive easing could drive inflation beyond expectations, especially with ongoing trade frictions and fiscal stimulus.
Clear Disagreements Among Policymakers
Although most officials advocate a wait-and-see approach, disagreements persist. Some policymakers argue that if a strong euro and geopolitical uncertainties continue to depress price levels, further easing in December cannot be ruled out. Meanwhile, there are also a few voices warning of possible future rate hikes, emphasizing that core inflation has not significantly decreased. Clearly, there is still contention within the ECB over the future path.
The Unignorable Influence of the Federal Reserve
Externally, the upcoming Federal Reserve meeting presents another uncertainty. The market broadly expects the US to commence an interest rate cut cycle in September. If the Fed signals more easing, it could lead to the euro's passive appreciation. This would force the ECB to reassess the impacts of exchange rate fluctuations on exports and prices.
France's Political Scene as a Potential Risk
With the French government undergoing another reshuffle, short-term fiscal deficit issues remain unresolved. The public debt ratio is approaching Eurozone highs, and the market is increasingly pricing in risk for French government bonds. As the second-largest economy in the Eurozone, France's unstable situation adds extra pressure on the ECB's policy communication. Investors expect Lagarde to respond cautiously to related questions at the press conference to avoid over-interpretation by the market.
Inflation and Economic Outlook
Recent data shows that overall inflation in the Eurozone is nearing the ECB's target level, while core inflation remains above 2%. Although wage growth has slightly slowed, it remains at a relatively high range. Business surveys show that manufacturing and services activities in some countries continue to improve, with German business confidence rising to a three-year high. However, recovery in consumption and investment is still lacking strength, and the economic foundation remains uneven.
Market Expectations and Future Outlook
Surveys indicate that investors generally believe the probability of another ECB rate cut this year is less than one-third. Most views suggest that the central bank may enter an observation period, awaiting clearer data to determine new policy needs for the economy. In the future, the inflation trajectory, France's fiscal risks, and the Federal Reserve's policy actions will be critical variables in determining the ECB's next steps.
