The European Central Bank (ECB) … is in deep trouble. Second, it has to deal with the increasingly strengthening euro and the re-emerging costly global oil price hikes. The Governing Council is under scrutiny to consider further adjustments to interest rates, despite recent indications that the ECB may be nearing the conclusion of its rate-cutting campaign. ECB President Christine Lagarde has consistently provided minimal forward guidance, leaving markets uncertain about the timing and likelihood of future rate cuts.
In June, Lagarde insisted that the ECB’s policy had to be “in a good place”. She argued for a balanced approach to monetary policy. At the same time, she signaled that the ECB was approaching the end of its cutting campaign. With the euro gaining strength against other currencies and oil prices trending upward, the pressure to revise the rates has intensified. Markets now price in roughly a 45% probability of a rate cut in September. This reflects the uncertainty that largely hangs around the ECB’s next move.
The ECB’s assessment of the medium-term inflation outlook continues to be robust. Yet it remains largely unshaken by recent swings in currency and oil markets. As analysts point out, this external context is certainly important, but it doesn’t change the overarching picture that the ECB has regarding the nature of the economy. The bank is expected to hold interest rates steady. This decision is announced amid great uncertainty in the U.S.-EU trade relationship.
In the weeks ahead, trade negotiations will continue to be a key area of concern for the ECB. The results of these discussions promise to greatly shape next year’s monetary policy debates. Lagarde is expected to formalize her earlier commitment from June. Most importantly, she will likely emphasize the need for close monitoring of outside conditions in an unpredictable global economy.
As Governing Council continues to monitor global trade developments, it reiterates its commitment to being cautious. The common currency’s appreciation and increasing oil prices would likely force the ECB to reconsider its policy. Despite the need for further economic action, Lagarde argues that their current approach is the most effective way to respond to today’s economic realities.