2025-09-11
A cut looks unlikely today: most previews and pricing point to a hold at a 2.00% deposit rate, with the Council stressing data‑dependence and keeping optionality for later easing if growth and prices soften again.
Euro area annual inflation edged up to 2.1% in August from 2.0% in July, with core steady at 2.3%, services at 3.1%, non‑energy industrial goods at 0.8%, and energy at −1.9%, leaving headline near target while services cool slowly.
The composite PMI printed 51.0 in August, with services near 50.5 and manufacturing showing modest repair, indicating a fragile expansion that does not press for a fresh cut at this meeting.
This mix supports patience now and optionality later if the disinflation trend resumes and activity loses momentum into the winter.
The three key ECB policy rates are unchanged since June: deposit facility 2.00%, main refinancing operations 2.15%, and marginal lending facility 2.40%, following calibrated steps earlier in 2025 as inflation drifted toward target.
Policy is steered primarily via the deposit rate, with a 15 bp corridor to the refi rate and a further 25 bp to the marginal lending rate to keep money‑market transmission stable as liquidity normalises.
The ECB has emphasised a meeting‑by‑meeting, data‑dependent approach with no pre‑commitment to a path, given the fine balance between near‑target prices and subdued growth.
| Indicator | Latest | Prior | Direction | Note |
|---|---|---|---|---|
| Deposit facility | 2.00% | 2.25% (earlier in 2025) | 🔻 Lower vs spring | Steady since 11 June 2025 |
| Main refi rate | 2.15% | 2.40% (earlier in 2025) | 🔻 Lower vs spring | 15 bp above deposit |
| Marginal lending | 2.40% | 2.65% (earlier in 2025) | 🔻 Lower vs spring | Upper bound of the corridor |
| HICP headline | 2.1% Aug flash | 2.0% Jul | 🔺 Slightly higher | Near 2% target |
| Core HICP | 2.3% Aug flash | 2.3% Jul | ➡️ Unchanged | Underlying steady |
| Services HICP | 3.1% Aug flash | 3.2% Jul | 🔻 Slightly lower | Easing slowly |
| Composite PMI | 51.0 Aug | Below 50 earlier | 🔺 Back above 50 | Fragile expansion |
Polling and market commentary point to a hold at 2.00% with language that preserves optionality for future easing if data weaken, so first‑hour moves in EUR/USD and Bunds should hinge more on guidance than on the print.
Recent surveys suggest the cutting phase has paused as inflation steadies near 2% and growth remains modest, making tone on wages and services inflation a likely driver of immediate market direction.
In such a setup, the curve often keys off forward guidance: the front‑end to the inferred rate path and the long end to growth signals and term‑premium shifts even when policy is held steady.
| Policy Action | Guidance Cue | Likely FX And Curve Bias |
|---|---|---|
| Hold at 2.00% with neutral-to-dovish tone | Data-dependence; inflation near target; growth soft | EUR ➡️/🔻; Bund 🔺; Curve bull-flatten (front-end leads) |
| Hold with firmer tone on wages/services | Vigilance on underlying price pressure; wage stickiness | EUR 🔺; Front-end ➡️/🔺; Curve bear-flatten (longer policy duration) |
| 25 bp cut today (low probability) | Hard to justify with 2.1% headline and 2.3% core | EUR 🔻 (surprise); Curve bull-steepen (front-end drops more) |
Stance language: whether the Council repeats “appropriately restrictive” or pivots toward normalisation if disinflation reasserts itself and activity slows into winter will shape near‑term rate‑path expectations.
Wages and services: references to negotiated pay and services inflation will show how comfortable the Council is with core at 2.3% and services at 3.1%, given signs of wage moderation ahead.
Balance sheet and liquidity: APP and PEPP portfolios continue to run off with the deposit rate as the primary tool, while liquidity operations keep money markets functioning smoothly.
Timing: rates at 13:45 CET and the press conference at 14:30 CET mean early moves can evolve as Q&A clarifies the reaction function and the conditions for any further reductions.
Negotiated wages are a major driver of services inflation because labour is a large share of services costs, and a Q2 reading around 3.95% year on year helps explain why services inflation remains above target even as headline sits near 2%.
The ECB wage tracker indicates moderation toward roughly 3% in 2025 as one‑offs fade and new settlements re‑anchor, which is consistent with services inflation easing from 3.2% in July to 3.1% in August.
If negotiated pay cools further into late 2025, services inflation should drift lower in step, improving the case for normalisation later without the need to cut today.
Holding at a 2.00% deposit rate would confirm policy is near a neutral configuration for current conditions, with inflation close to 2% and activity modestly positive, reducing the need for a new step today.
It would signal a preference to guide through communication and corridor settings while the pass‑through of earlier moves to bank funding, credit, wages, and service prices is assessed.
Markets would then focus on the press conference for shifts in the perceived duration of restraint or thresholds for resuming the easing cycle later if data soften.
A fresh cut would be easier to justify if upcoming data show inflation slipping below target on a lasting basis, with core easing further and services slowing more decisively, alongside a broader loss of growth momentum.
Given headline at 2.1%, core at 2.3%, services at 3.1%, and the PMI at 51.0, that threshold is not met, which is why the baseline points to a hold with conditional guidance rather than a resumption of cuts today.
Optionality will remain: external risks and the wage path could still push disinflation back to the fore, keeping a year‑end adjustment on the table if conditions warrant.
The weight of evidence favours a hold at a 2.00% deposit rate with language that preserves optionality, because inflation sits near target, core is steady, services are easing slowly, and growth is fragile but positive.
Market impact should hinge more on guidance about wages, services, and the duration of restraint than on the print itself, since a steady outcome is widely expected and priced.
Clearer signs of wage moderation and broader disinflation would strengthen the case for normalisation later, while stickier services and firmer pay could lengthen the period of restraint without fresh hikes.
Disclaimer: This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment, or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by EBC or the author that any particular investment, security, transaction, or investment strategy is suitable for any specific person.
