By Balazs Koranyi and Francesco Canepa
FRANKFURT (Reuters) -The European Central Bank is all but certain to leave interest rates unchanged for a third meeting in a row on Thursday, enjoying a rare period of low inflation and steady growth even in the face of turbulence caused by shifting trade relations.
The ECB cut rates by a combined two percentage points in the year to June but has been on the sidelines since, making clear it is in no hurry to change policy given that inflation is at target, a sweet spot neither the Federal Reserve, the Bank of England nor the Bank of Japan has achieved.
But while all 88 economists polled by Reuters see no change in rates this month, ECB President Christine Lagarde is unlikely to shut the door to further policy easing as the ever-shifting U.S. tariff regime has yet to fully work its way through the economy, keeping uncertainty elevated.
CAN’T OVERENGINEER POLICY
Meeting in Florence instead of Frankfurt, Lagarde is likely to stick to her mantra that the ECB is in a “good place” and that incoming data will guide policymakers, who can live with small deviations from the inflation target and will not try to “overengineer” policy.
She is also likely to point to third-quarter growth data published hours before the decision that showed the euro zone economy expanded faster than the bank and economists had predicted, providing further evidence of resilience.
The bloc grew by 0.2% on the quarter, ahead of the stagnation predicted by the ECB and the 0.1% growth forecast by economists, as Spain and France both outperformed.
GDP along with other data remains consistent with the ECB’s narrative that growth is modest but steady, and inflation is holding around target, even if a temporary dip next year is likely.
Some early fourth-quarter figures may even point to some pick-up in growth.
Business activity, measured in a Purchasing Managers’ Index survey, is accelerating, sentiment in Germany, the bloc’s biggest nation, is improving and businesses are becoming more optimistic, partly because the fog over tariffs is starting to lift.
But these relatively upbeat reports are balanced out by more sombre data showing that industry continues to suffer and that exports to the United States are down sharply, as well as growing evidence that China is dumping goods it cannot sell in the U.S. on European markets.
WILL THE GOOD PLACE LAST?
The real question then is whether the outlook can remain in such a fine balance given the continued tariff hit, Chinese trade diversion and weak exports.
“Financial conditions have gotten substantially tighter,” Bank of America said. “The ECB will find it hard to avoid reflecting a larger and/or more persistent inflation undershoot in its updated forecasts in December.”
The strong euro is also weighing on inflation, but the currency has steadied in recent weeks and a hawkish tone from Federal Reserve Chair Jerome Powell after Wednesday’s rate cut may limit further gains.
Undershooting risk would strengthen the case for a “slightly lower” policy rate, ECB Chief Economist Philip Lane argued recently, a message that is consistent with market pricing which now puts the chance of one last cut by next June at around 40% to 50%.
But the majority of economists and a long list of policymakers see rates remaining where they are on the premise that uncertainty will fade, households have plenty of savings to spend and the German government is raising spending sharply.
“The stable labour market, a growing service sector and the German fiscal stimulus will provide a tailwind to the euro zone economy in the coming months,” Berenberg economist Felix Schmidt said.
Inflation could still undershoot the ECB’s target next year but it is then seen coming back up and policymakers have made it clear that they can tolerate temporary deviations.
The real test of this tolerance is only likely to come in December, when the bank presents fresh projections, including initial estimates for 2028.
(Reporting by Balazs Koranyi; Editing by Kirsten Donovan, Kim Coghill and Catherine Evans)
