Macro: Sandcastle economics
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ECB rate decision: A post-summer balancing act
Saxo Strategy Team
What: ECB Rate Decision
When: Rate decision and press release on Thursday, 12 September at 12:15 GMT (14:15 CET) and post-meeting press conference at 13:00 GMT (15:00 CET)
Expectation: A 25-basis point rate cut is anticipated, but don’t expect any clear forward guidance beyond that. The ECB is expected to remain data-dependent, closely monitoring services inflation and wages. While bond markets are pricing in a 63bps reduction by year-end, with additional cuts at each meeting through the first half of 2025, this outlook appears overly optimistic. A more likely scenario would be gradual rate cuts every quarter, as persistent core inflation pressures will likely prevent the ECB from adopting a more aggressive rate-cutting approach.
How will the market likely react? A 25bps rate cut is expected and largely priced in, so there may be limited immediate impact. However, with no clear forward guidance and the ECB remaining data-dependent, bond markets could see a pullback if expectations for aggressive rate cuts (65bps by year-end) are seen as overly optimistic following Christine Lagarde’s press release. Equity markets may remain subdued, particularly in sectors sensitive to interest rates, while downward revisions to growth forecasts could also dampen risk appetite. Overall, market volatility may persist as investors adjust to the reality of gradual, data-driven rate cuts. Read Althea Spinozzi’s, Saxo’s Head of Fixed Income Strategy, ECB preview for more insights.
The table below shows our views ahead of the September ECB meeting.
Why does it matter? The ECB meeting holds significant weight for markets as it shapes monetary policy, directly affecting interest rates and investor sentiment. Decisions made during these meetings influence economic expectations and drive asset prices across the euro area. With global central banks becoming less synchronized in their monetary policies, the ECB's actions are now more critical than ever for the forex market, making its rate decisions increasingly pivotal for market direction.
As the chart below illustrates, the market expects the ECB deposit rate to drop to 2% by July 2025, suggesting a rate cut in December, followed by additional cuts at each meeting from January 2025 through July 2025. If these expectations are not met, or if they are exceeded, volatility is likely to surge across asset classes.
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