Where does the ECB go after September? Policymakers are increasingly divided

On September 3, 2024, the clock is ticking and the European continent's economy is in flux. At this critical juncture, the ECB's future course of action is increasingly uncertain, and the divisions among policymakers are widening like a raging undercurrent.

At present, the economic situation of the eurozone is like a complex picture, full of unknowns and challenges. The ECB's three key interest rates - the main refinancing rate, the marginal lending rate and the deposit mechanism rate - are 4.25 per cent, 4.50 per cent and 3.75 per cent respectively. The market had been widely expected that the central bank will cut interest rates again in the past September, however, for the policy direction after September, policymakers have different words, it is difficult to reach a consensus.

Policy doves are worried, acutely aware that the economy seems more fragile than they thought and that recession looms. They see the slowdown in hiring as a dangerous sign that the job market is about to weaken. If employment deteriorates, disposable income will inevitably fall and consumption, an important engine of economic growth, will quickly stall, triggering a self-reinforcing recessionary cycle. Based on this, they believe that it is urgent to accelerate interest rate cuts, which is a key move to address the risk of a potential recession.

Hawkish officials, by contrast, have different calculations. They point out that actual growth figures have been outperforming slightly weaker surveys and that the economy is still struggling to keep growing. The consumer sector remains strong, Europe has just had a surprisingly good travel season, and construction is finally rebounding after a long wait. In their view, growth remains robust, and although industry is Mired in a deep slump that could tip Germany into recession, they see this as more of a structural problem than an overnight solution, in which monetary policy can play a limited role. In addition, wage growth remains well above the 2% inflation target, suggesting that real incomes are picking up quickly and will continue to inject momentum into the economy. For the hawks, the ECB must stay committed to its goal of reducing inflation to 2% by 2025 or risk serious damage to its credibility. Therefore, they advocate a slow rate cut to ensure the stable operation of the economy and the gradual achievement of the inflation target.

According to the sources, the divisions within the ECB are unlikely to have a significant impact on the policy decision in September in the short term, after all, the September rate cut has become the consensus of the market. However, the disagreement could have a profound impact on how ECB President Christine Lagarde communicates her decision, changing market expectations for the October meeting. Doves expect Lagarde to highlight the risks to growth and signal that a series of interest rate cuts is not out of the question. But hawks are deeply concerned that such a message could unduly reinforce market expectations for an October rate cut, putting the ECB in a quandary. Investors are now pricing in a 40 to 50 per cent chance of an ECB rate cut in October, an uncertainty that has further exacerbated market nervousness.

The ECB's actions after September are fraught with uncertainty, and its decision will depend heavily on the performance of economic data and policymakers' assessment of the economic outlook. At this challenging time, the ECB must carefully strike a balance between hawkish and dovish views in its efforts to achieve stable economic growth while ensuring successful achievement of its inflation target. This is undoubtedly a difficult task that will require great wisdom and courage on the part of policymakers. In the coming days, every decision of the European Central Bank will be like an anchor in the economic ocean, having a profound impact on the economic trajectory of the eurozone. It will be interesting to see how the ECB navigates its way through the divisions to chart the course for the future of the European economy.