We expect the ECB to leave the depo rate unchanged at 2.00% at its 11 September meeting. We believe the ECB will continue to emphasise data dependence and a meeting-by-meeting approach, with no change in guidance. ECB President Lagarde is likely to emphasise the ECB is well positioned with rates at current levels (i.e. neutral) to navigate ongoing uncertainty due to US trade policy. The ECB will publish new forecasts. Importantly, we do not expect the ECB to materially change its medium-term view or meaningfully alter forecasts for 2027. But this is where Sep meeting ends. We believe the recent outperformance in growth indicators was more because of front loading of exports to US. Also trade diversion effects relating to cheaper imports from China will continue to be closely monitored. A recent ECB blog noted that trade tensions between the US and China could result in China exports being redirected to the euro area. The associated lower import prices could bring down euro-area inflation by as much as 0.15ppt. The ECB will likely monitor these prices carefully for potential feedthrough to producer and consumer prices further down the line. EUR strength will exacerbate disinflation concerns for some ECB Governing Council members. The EUR is at an all-time high measured on a nominal effective exchange basis, up about 2% compared with the June policy meeting. Hence, what the ECB does beyond September is far from assured. Markets are currently pricing in only 9 bps of cut by Dec’25 which we feel is under pricing for a possible cut. With crude being 65 centric and natural gas prices being well behaved, inflation might even surprise on the downside. This keeps the 25-bps cut in the Dec meeting in play for us. By December, we are likely to have further evidence that US tariffs are weighing on euro-area exports and growth. We also expect disinflationary pressures to have increased, with headline CPI likely back below the ECB’s 2.0% target, and core CPI edging close to 2.0%. Given that the 15% US tariff is slightly worse than the baseline 10% rate underpinning the ECB’s June projections, there is a risk that its projections are lowered slightly again (potentially for both 2026 and 2027) to reflect the disinflationary impact from weaker US demand for euro-area exports. Hence, we continue to believe 18th December ECB meeting is live for a last 25 bps cut.
