ECB sees itself in a "good position", and "wants to continue to be in a good position"
Interest rate bottom confirmed
At its policy meeting on 11 September, the ECB unanimously and as expected kept its policy rate, the deposit rate, unchanged at 2%. That means its refinancing and marginal lending rates also remain unchanged at 2.15% and 2.40% respectively.
KBC Economics assumes that this remains the bottom of this interest rate cycle. However, ECB President Lagarde did not want to confirm yet that this marks the end of the easing cycle. She did, however, indicate that the end of the eurozone disinflation process had been reached. In other words, future ECB decisions will remain data-dependent, and will be taken on a meeting-by-meeting basis based on the data available at the time. The central bank reiterated that it does not want to precommit to a specific future interest rate path. So expectation-driven monetary policy is not about to return in the near future.
The policy decision was based on the ECB economists' outlook update. Regarding inflation, ECB economists expect headline inflation to average 2.1% in 2025 (versus 2.0% in June), 1.7% in 2026 (versus 1.6%) and 1.9% in 2027 (versus 2.0%). The path for core inflation (excluding energy and food) remained virtually unchanged. For core inflation, they expect an average of 2.4% in 2025 (unchanged), 1.9% in 2026 (unchanged) and 1.8% in 2027 (versus 1.9%). All in all, this therefore means that inflation is on a sustainable path towards the 2% target, according to the ECB economists.
As for growth, on balance, ECB economists expect resilient growth in the euro area. This is expected to reach an annual average of 1.2% in 2025 (versus 0.9% in June). The growth forecast for 2026 is 1.0% (versus 1.1%. The growth forecast for 2027 remains unchanged at 1.3%. Growth differences are mainly explained by the fact that the ECB no longer expects the EU to take significant retaliatory measures in the trade dispute with the US. ECB economists also took lower uncertainty regarding the international trade environment into account.
Indeed, assuming this scenario, an additional rate cut by the ECB was no longer necessary. ECB president Lagarde indicated that the ECB sees itself in a "good position” with a policy rate of 2%, and that she "wanted to continue to be in a good position”. She was referring to the fact that the ECB wants to remain flexible in terms of its future interest rate policy. Since the interest rate decision was in line with market expectations, the market reaction was very limited in terms of German bond yields and the euro-dollar exchange rate.
Divergence with the Fed
As mentioned above, KBC Economics expects the current 2% deposit rate to be the bottom of the easing cycle. This contrasts with Fed policy, for which we expect the Fed to resume its easing cycle next week. Indirectly, this policy divergence could also affect the euro exchange rate, which we see appreciating further against the dollar. The resulting disinflationary effect is something the ECB will have to take into account in its future interest rate decisions. However, in our view, this effect alone will not be large enough to prompt the ECB to resume its easing cycle.
Intra-EMU spreads and market functioning
Recently, there has been upward pressure on EMU sovereign spreads against German government bonds. In particular, the political situation in France, significantly linked to the state of French public finances, caught the attention of financial markets.
As usual, however, Lagarde did not comment on specific developments in individual EMU member states. She did note that according to the ECB, European bond markets are currently operating in an orderly and smooth manner, with good market liquidity. That comment implies that, until further notice, the ECB sees no problems with the transmission of its monetary policy throughout the eurozone. Consequently, there can be no question of any activation of the Transmission Protection Instrument for the time being.
Market liquidity in the eurozone, meanwhile, is being gradually further reduced by quantitative tightening on autopilot; ECB assets at maturity in its APP and PEPP portfolio are not reinvested. In this regard, Lagarde stressed that this deleveraging schedule was communicated to markets clearly and well in advance and that the impact on bond yields (and thus monetary conditions) is therefore limited, in her view. For the ECB, the main and most efficient policy instrument remains the policy rate. And that, at least according to Lagarde and the ECB, is in a good place.