ECB points to rising inflation expectations in decision to pause rate cuts

The European Central Bank (ECB) is pausing on rate cuts, and it’s blaming rising inflation expectations. The central bank made that call after new survey data on Friday showed that people across the euro area now expect prices to rise 2.8% over the next 12 months.

That’s up from 2.6% in July. The five-year forecast also nudged up to 2.2%, while the three-year view stayed flat. The ECB says those expectations are enough to hold rates where they are.

That deposit rate? Still locked at 2%. The message from Frankfurt is loud and clear: no cuts unless absolutely needed. The numbers came from a consumer survey published Friday, according to Bloomberg.

Some members of the Governing Council argue they’ve done what they set out to do. “We can say with some pride that we’ve achieved our goal,” said Peter Kazimir, adding that the next move, if any, will depend on how things play out from here. For now, the mood is to wait, not act.

Policymakers argue over next move ahead of December forecast

August inflation landed right on the 2% target, but it’s expected to move up again to 2.3% in September. President Christine Lagarde didn’t sound like someone eager to change course, saying the ECB is currently in a “good place.”

What’s making this more complicated is food. Executive Board member Isabel Schnabel flagged food costs rising faster than other goods and services. She warned that could push expectations even higher, which could force the ECB to stay on guard longer than expected.

The last round of staff projections had inflation in 2027 at 1.9%, just below the ECB’s goal. The next update in December will include numbers for 2028 for the first time. If those show inflation falling too far, the case for future cuts may return.

The ECB’s survey also revealed where the public stands on other metrics. Growth over the next year is still seen at -1.2%, while unemployment is expected to rise to 10.7%. Nominal income growth has ticked up to 1.1%, compared to 0.9% the month before.

Spending expectations stayed put at 3.3%. Home prices are expected to rise 3.4% over the next 12 months, and mortgage rates are projected to remain steady at 4.5%.

Council members disagree over whether the job is done

Council members are not on the same page about where this goes next. Martins Kazaks from Latvia said it would be “naive” to think inflation will always sit right at 2%, and “inappropriate to adjust rates whenever there’s a hit or miss.” He said there’s no rush and called the chances of a move in October low. “The December meeting will be much richer in terms of data,” he said.

Yannis Stournaras of Greece described the current setup as a “good equilibrium,” though not a perfect one. He added that unless something major changes in the data, there’s no reason to touch the rates. Still, he admitted that if 2028 inflation turns out meaningfully below 2%, it would be a concern.

Edward Scicluna from Malta shares that sentiment. “If things were to stay the way they are right now, you could say that rates are fine where they are,” he said. But he didn’t rule out another cut; in October, December, or not at all.

On the other hand, Gediminas Simkus from Lithuania took a different view. “From a risk-management perspective, it’s better to cut than not,” he said. He wants a December cut, claiming it would help the economy and inflation.

But even Simkus said it’s hard to imagine inflation rising above the ECB’s target anytime soon. He expects 2028 projections to come in below 2%. He also pointed to weak inflation due to rising imports from China and a stronger euro.

On top of that, some countries aren’t even implementing the new emissions-trading system properly, which adds more drag. Madis Muller from Estonia sees no reason to do anything for now. He said rates are “mildly supportive” of both growth and price goals.

Portugal’s Mario Centeno, who’s on his way out of the Governing Council, said it’s possible to look through low inflation for a few quarters, but not forever. “At some point we will have to do something, also to avoid a de-anchoring of inflation expectations if it is for too long below target,” he said.

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