ECB Update: Communication clear, markets largely unchanged

The economist view: In a good place

As expected, the European Central Bank (ECB) kept rates on hold on Thursday (11 September), with the deposit rate retained at 2.0%. They continue to take a “data-dependent”, “meeting-by-meeting” approach and continue to send a message that they are not pre-committed to a particular path. 

I continue to have one more rate cut pencilled into my forecasts, but bearing in mind data could disappoint and that the near-term balance of risk to my forecast is skewed in favour of them staying on hold.

They continue to be, according to President Christine Lagarde “in a good place”. Lagarde gave little away directionally, but that makes sense when inflation is roughly at target, when your inflation forecasts aren’t far from target, and you see the risks to growth as having become more balanced (Lagarde described the domestic economy too as “showing resilience”). The decision itself was unanimous. I continue to have one more rate cut pencilled into my forecasts but there the burden of proof is on the data to disappoint and the near-term balance of risk to that forecast is skewed in favour of them staying on hold.

President Lagarde described the disinflationary process as over. There didn’t seem to be any kind of directional hint on policy (and later in response to a question effectively on the bias of policy, she talked about not overengineering it). It seemed more an acknowledgement that inflation had returned to target, was no longer trending in a particular direction, and with things potentially developing in either direction from here. The discussion on inflation in the statement seemed relatively balanced with expected wage moderation likely to “keep a lid on domestic price pressure” even as profits recover, energy inflation expected to rise, but core inflation expected to cool “owing to the stronger euro and declining labour cost pressures”. However, the statement also points out again that the outlook for inflation is “more uncertain than usual”.

The outlook for inflation is “more uncertain than usual”.

Updated staff forecasts for Consumer Price Index (CPI) are revised up for 2025 and 2026, but down a touch for 2027. The 2027 core inflation forecast is also revised down a touch, with the latter now two tenths below the 2% (headline inflation at 1.9% is forecast to be a tenth below target)1. However, note that in the press conference when talking about the forecasts, Lagarde also said that “minimal deviation” will not necessarily justify any particular movement (in policy).

The ECB’s forecast for 2025 GDP growth is revised up (to 1.2% from 0.9%), is slightly lower in 2026 and is unchanged (at 1.3%) in 20272. While they don’t give an assessment of the balance of risks to inflation, they importantly do now see the risks to economic growth as more balanced (rather than on the downside). That reflects an abatement of trade uncertainty compared to June.

She was asked questions on the situation in France and relatedly on bond markets and the TPI (Transmission Protection Instrument, which can be deployed to address problems in regions seeing financial conditions deteriorate in a way not justified by country-specific fundamentals). She would not be drawn on commenting on France in particular, but did point out that euro area sovereign bond markets are orderly and have good liquidity. She also said they did not discuss TPI during the meeting.

The fund manager view: Communication clear, markets largely unchanged

Following the decision of the European Central Bank (ECB) to keep interest rates on hold, and signalling that it remained in full data dependence mode, the incoming economic data over the past seven weeks meant that expectations for the ECB Governing Council’s September meeting were clear. The market was pricing for no change to interest rates and focus was to be on any revisions to the outlook. The ECB did not disappoint, and even with the accompanying small downward revision to inflation forecasts for 2027–and inflation remaining below their 2% target in 2026–the message was abundantly plain: the ECB remains in a good place, with no pre-determined rate path and monetary policy decision will be made on a meeting-by-meeting basis. This view was unanimous amongst the members of the ECB’s Governing Council.

Given a general de-escalation in trade tensions, and with inflation broadly at target, it made perfect sense for the ECB committee to maintain rates where they are.

In the press conference, ECB President Christine Lagarde made the point that the current global geo-political environment meant that the inflation outlook remains more uncertain than usual. However, she also stated that the risks to growth are, for now, more balanced than perhaps they were previously, with a general de-escalation in trade tensions. Against this backdrop, and with inflation broadly at target, it made perfect sense for the committee to maintain rates where they are (in the range of where the ECB assesses neutral to be) and to re-iterate a commitment to data dependence. Lagarde was asked on several occasions during the press conference, albeit in slightly different formats, to comment on the future path of interest rates, but the messaging was the same each time: the ECB continues to be in a good place, and any future decisions will be taken at the time to ensure this remains the case.

One point of excitement for the market was Lagarde stating that the “disinflationary process was over”, which was interpreted by some as a signal that the rate cuts were over for this cycle, and shorter-dated European government bonds sold off. However, this was more of a statement regarding the effectiveness of policy easing measures taken to date and should have been interpreted as such, and not as a signal as to the future policy path.

Given the recent performance of French government bonds, following the confidence vote called by (now former) Prime Minister Francois Bayrou (3), the inevitable questions regarding the ECB view and potential use of its Transmission Protection Instrument (TPI) tool were posed. TPI was introduced by ECB as a further mechanism to ensure the effective transmission of monetary policy across the Eurozone, should conditions warrant it4. The answer from Lagarde was equally predictable – as a central bank for Europe, she would not comment on individual countries, but she was confident that decision makers in individual countries would make the right decisions to reduce uncertainty. The TPI tool remains flexible, and its use is at the discretion of the governing council, but it was not even discussed at this meeting, suggesting that the ECB does not, for now at least, have any concerns over the functioning and/ or pricing of government bonds within the euro area countries.

Overall, the ECB will view this meeting as a success – communication was clear, markets were largely unchanged, and the future path of rates priced by the market is largely balanced. We now keep a keen eye on the incoming data as to what their next step may be.

1 ECB staff macroeconomic projections for the euro area, September 2025

2 ECB staff macroeconomic projections for the euro area, September 2025

3 France’s confidence vote rattles bonds, leaves stocks unmoved

4 The Transmission Protection Instrument

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