Synopsis:

HSBC expects the ECB to deliver its second rate cut of the cycle, despite ongoing economic underperformance in the Eurozone. The new forecasts are unlikely to significantly alter the projected inflation path, reflecting a divided debate within the ECB.

Key Points:

• Rate Cut:

  • A 25bp cut is anticipated as the ECB continues its easing cycle before the Fed begins its own rate adjustments.

• Economic Activity:

  • Eurozone economic performance has been weak recently, but this is unlikely to cause significant changes to the ECB’s inflation forecasts.

• Internal ECB Debate:

  • Doves: Focus on slowing growth, disinflation trends, and recent evidence of slower wage growth.
  • Hawks: Point to persistent inflation in certain components, high services inflation, and still elevated wages.

• Guidance and Future Easing:

  • President Lagarde is expected to be non-committal about future rate cuts, reflecting the ECB's divided stance.
  • The market assigns a 40% probability to a further rate cut in October, which seems reasonable given the likely lack of concrete guidance on Thursday.

Conclusion:

HSBC predicts a 25bp rate cut from the ECB, with the future pace of easing remaining uncertain. The ECB's debate over inflation and growth dynamics means President Lagarde is likely to provide limited guidance on subsequent rate cuts. The market anticipates a 40% chance of another cut in October.