• The ECB cut rates as expected but there was very little in the way of news. After pre-committing to the first cut in June policymakers have no intention to set out a specific easing schedule now, and the updated projections were barely changed. The case for clearer (or indeed any!) forward guidance will get stronger as the ECB moves rates closer to the neutral mark. For now it does seem as though the ECB has set off on a steady path of quarterly cuts at projection meetings, although a back-to-back cut next time out in October can’t be entirely ruled out – flexibility remains the order of the day and risks to the growth outlook are tilted to the downside.
• Next week’s BoE meeting also looks set to be relatively low key. Another move after the first cut in August does not look likely – we expect a 7-2 vote to leave rates unchanged. Unlike the ECB, the BoE is not devoutly ‘data-dependent’ and the meeting minutes may provide some clues around future easing. Our base case is for a steady pace of cuts. There are arguments for a more proactive approach but it’s hard to see how the MPC, which is deeply divided around the persistence of inflationary pressures, can find a consensus on this at the moment.

ECB review: Sticking to the script

The ECB continued its easing cycle, as expected, with another 25bp rate cut. The key line in the statement was the judgement that “it is now appropriate to take another step in moderating the degree of monetary policy restriction”.  As expected, it was a relatively low-key meeting without much in the way of new information.

Lagarde said that it was a unanimous vote and that further evidence of the gradual disinflationary process meant that it was “perfectly appropriate” to cut rates. It was probably a simple enough decision for policymakers with recent data releases broadly supportive of continued easing. Since the last meeting in July, various indicators have showed slowing wage pressures and headline inflation fell from 2.6% to 2.2% in August. Concerns around a stuttering growth backdrop have also risen after various pieces of bad news around the German economy. However, there are still some reasons for caution. Services inflation has come in higher than expected and wage growth, while slowing, is not yet consistent with the inflation target.

Against that background, the ECB saw no need for anything in the way of fresh guidance. The ECB continues to stress that it is “not pre-committing to a particular rate path”. Christine Lagarde said that the ECB “will continue to follow a data dependent and meeting by meeting approach”. So, while the initial cut in June cut was well-telegraphed in advance, policymakers remain clear that there is no intention to set out any specific easing schedule now. As we argued at the time, the case may well have been stronger for an initial move back in April than it was in June (see here). With experience in mind policymakers seem reluctant to give much in the way of forward guidance at all now.

It was a projection meeting but, as expected (see our preview here), changes to the numbers were minimal. The ECB’s growth projections have been revised slightly lower to 0.8% in 2024 and 1.3% in 2025. The ECB’s headline inflation projections were left unchanged at 2.5% in 2024 and 2.2% in 2025. There was a small upward revision to the core numbers. These numbers are now more or less in line with our views (see our latest global outlook summary here) but we do think the ECB’s near-term growth path looks a little optimistic. Another downward revision to GDP in December would not be a surprise.

Chart 1: The ECB seems less concerned about underlying wage pressures

Chart 2: Little change to headline inflation projections, slightly higher on core

So, what’s next? Prior to this meeting our base case was for cuts to continue at a quarterly pace into 2025, with projection meetings (June, September, December, March) remaining the obvious point to do so. With little in the way of news yesterday there is no reason to change that view. After the summer break, the next policy meeting comes in just five weeks (17 October), which Lagarde acknowledged is a “relatively short interval”. With Q3 wage data not available until the December meeting there will be little new information between now and then. The September inflation figure will be the most notable release, but Lagarde warned that this is likely to fall due to base effects (and then rise again later in the year) and that a lot of weight should not be placed on this single figure. Absent a shock, we think the bar to a back-to-back move in October is quite high – but ECB policymakers did not close the door on the possibility and it can’t be ruled out. Flexibility remains the order of the day.

All told, the ECB looks to have set off on a steady path of quarterly cuts in the absence of a crisis and as long as wage costs keep moderating we think there will be broad acceptance of this among Governing Council members, at least initially. Things might get trickier when it is no longer clear that rates are in restrictive territory. Lagarde mentioned ECB research that r* is “probably a tad higher than it used to be” in the Q&A. We pencil in a neutral nominal rate of 2.0-2.5%, but upper estimates can reach 3% and all else equal we’d expect more dissent from hawkish policymakers as rates approach that level. The case for clearer (or indeed any!) forward guidance will get stronger as the ECB moves rates closer to this mark.

Still, the balance of risks is probably tilted towards a faster pace of easing given the gloomy growth outlook. We see euro area growth slightly lower than the ECB in 2024 (0.7% vs 0.8%) in what we expect to be a middling euro area recovery, with weakness in Germany acting as a brake on overall activity. A faster pace of easing from the Fed might also increase the likelihood of some kind of dovish pivot on this side of the Atlantic. But, for now, the ECB’s cautious approach seems set to continue.

BoE preview: Divisions in the MPC point to a steady pace of easing

And so to the BoE, which hiked rates further and faster than the ECB and has more headroom for cuts – but looks set to stand pat, for now. After the initial cut in August, Governor Bailey said the BoE needs to take care “not to cut interest rates too quickly or by too much”. There hasn’t been any clear change in messaging over the summer. At Jackson Hole, Bailey said “the course will … be a steady one” and added that the BoE “needs to be cautious”. We expect a 7-2 vote split to leave rates unchanged next week, with Ramsden joining arch dove Dhingra in voting for a back-to-back cut (he voted for easing at both the May and June meetings). We assume new MPC member Alan Taylor will vote with the majority initially.

The data flow since the August policy meeting has been mostly positive from a monetary policy perspective. The uptick in inflation in July was smaller than expected (2.2%, from 2.0%, with a notable fall in the services component) and there has been further evidence that the labour market is cooling. Monthly output figures released this week will also reassure policymakers that the economy is not overheating after one-off factors resulted in above-trend GDP growth figures in H1 this year.

The BoE does not share the ECB’s current data dependent/non-committal approach. After the August cut, Bailey said that the BoE need not adjust its course in response to data surprises and emphasised a forward-looking approach is required given the lags involved with monetary policy. Against that background, any kneejerk reaction to August CPI, released the day before the BoE’s announcement, seems unlikely, even if it were to surprise significantly to the downside. However, if the BoE were indeed to stay on hold next week, as expected, this current framework allows for a dovish tilt in the minutes to tee up a cut at the next meeting in November.

Chart 3: Inflation rates are notably elevated compared to the start of previous easing cycles

Chart 4: Growth momentum has cooled in recent months, but the economy has exited its period of near-stagnation

Now, there is an argument that fairly rapid tightening from December 2021 was required to rein in domestically-generated inflationary pressures after the trend for a smaller share of floating rate mortgages and healthier household balance sheets has weakened the consumer cash-flow channel of monetary policy. That holds in the opposite direction and would suggest relatively forceful action may also be required to effectively ease policy. On top of that, the UK will soon have fiscal and monetary policy pulling in opposite directions. The PM has said that the Autumn Budget (30 October) will have some “painful” consolidation measures, to which the BoE will certainly pay close attention.

However, the MPC is notably divided. The decision to cut in August came with a 5-4 vote split, and without the backing of the chief economist. Against that background it looks unlikely that a consensus can be found at this juncture to front-load easing. The hawks have plenty of ammunition: nominal pay growth is still uncomfortably high from a monetary policy perspective and inflation remains elevated compared to the start of previous easing cycles (Chart 3).

By the turn of the year policymakers will have more information about the extent of fiscal consolidation and persistence of underlying wage pressures. There may also be more clarity around the health of the US economy (and indeed Fed policy). A US slowdown is an obvious risk to our slightly above-consensus view on UK growth next year (see here). So while our base case as it stands is for a gradual, quarterly pace of easing, there is certainly scope for a pivot down the line in spite of the current divisions in the MPC.

The BoE’s balance sheet will also be in focus with a vote on the pace of QT over the next year. The BoE opted to reduce its gilt holdings by 100bn GBP between October 2023 and September 2024 (which will leave Asset Purchase Facility holdings at 658bn).  A continuation of this pace over the next 12 months seems most likely given the lack of any suggestion otherwise, although the maturity profile means that would be mostly comprised of redemptions (87bn) rather than active sales, a shift from last 12 months which saw a 50-50 split.

The BoE is happy for QT to run in the background and for rate changes to be the active monetary policy tool. In August the BoE noted that QT will only have a “very small” impact on rate adjustment decisions given its limited tightening effect on the macroeconomy (see Box A here).