Lagarde: Interest rate cut in September is still pending, to be determined by data, labor market remains remarkably resilient

As expected by Wall Street, the European Central Bank did not continue to cut interest rates in July, maintaining the three key interest rates unchanged.

On the evening of July 18th Beijing time, European Central Bank President Christine Lagarde held a monetary policy press conference, stating that data is needed to provide greater certainty, and the European labor market continues to show remarkable resilience, indicating that the central bank can wait for the best time to cut rates.

Lagarde said that the decision to keep rates unchanged was unanimous, and the decision to continue relying on data and "step-by-step meetings" was also unanimous. The financing costs in the euro area are still constrained, and credit dynamics remain weak.

The questions for September and what we will do in September are still pending, and will be determined based on all the data we receive.

She also mentioned that economic growth is expected to pick up in the second quarter, although the pace may be slower than the first quarter. While consumption and exports have provided support to the economy, there are still risks of growth slowdown.

Inflation is expected to fall to target levels in the second half of next year, labor market remains remarkably resilient

Lagarde told the media that multiple indicators show that wage levels in the euro area are moving towards relatively high levels. This is not surprising, as market expectations for wages to catch up have increased after recent inflation spikes.

Wages are still growing at a high level, and labor costs are expected to remain high in the short term.

Lagarde pointed out that the European labor market still shows resilience, and more job opportunities may be created in the second quarter, mainly in the service sector.

Interestingly, she also stated that wage growth is expected to significantly slow down in 2025 and 2026, while productivity is expected to improve, but not as much as officially expected.

Lagarde reiterated that inflation in the euro area remains high, and it is expected to fluctuate around current levels in the second half of this year, with HICP inflation falling to target levels in the second half of next year.

Will there be a rate cut in September?

Despite the more cautious tone of this policy statement, some senior officials have recently indicated their willingness to support another one or two rate cuts. After the interest rate decision was announced, expectations for a 25 basis point rate cut in September have increased.

Hussain Mehdi, Chief Investment Strategist at HSBC Asset Management, stated that the likelihood of a rate cut in September is "quite high."

Leading indicators show a slowdown in wage growth, unexpected downward movement in US CPI inflation in June has opened the door for the Fed to cut rates, limiting the downside pressure on the euro.

Central bank governors will be keen to ensure a soft landing for the economy.

He said that with falling interest rates and global economic expansion, regions like Europe can continue to perform well.

Mark Wall, Chief European Economist at Deutsche Bank, also stated that the European Central Bank is moving towards a rate cut in September.

Wall pointed out that the ECB interprets some inflation data as one-off factors, while others are considered to have been absorbed into profit margins:

The European Central Bank is pleased with the trend and is ignoring the noise, which is consistent with the stance of "relying on data, not on a single data point."

Bridgewater's Frederik Ducrozet also agrees with this view:

(Statement) Policy implication: The European Central Bank is not in a hurry to ease policy again, nor will it commit to a specific interest rate path in advance, but recent data points have not substantially changed the outlook. The European Central Bank is still on track to cut interest rates quarterly.

A series of key data will be released in the coming weeks, including two CPI inflation reports, wage and economic data, which may become key variables for the European Central Bank's interest rate cut in September