Citigroup has updated its ECB interest rate forecast, predicting two policy cuts in September and December, respectively. The change partially reflects market expectations, but there are differences in the degree of easing. Traders currently anticipate just one more rate cut in 2025.
Inflation data from both sides of the Atlantic continues to be one of the primary drivers. Furthermore, there has been no word from the European Central Bank regarding its post-summer plans. Meanwhile, VXX performance indicates that market sentiment appears stable despite ongoing price changes caused by tariffs.
Will the ECB Finally Act This September?
The ECB has previously signaled a summer pause, but it is still unclear what the policy path will be in September. Traders are currently pricing in only 25 basis points of easing, indicating skepticism regarding a second cut.
As inflation data becomes available, market sentiment stays stable. The iPath Series B S&P 500 VIX Short-Term Futures ETN (VXX) is currently trading at $45.39. It is nearly half of what it was fifty-two weeks ago. Despite a 2.09% weekly decline, volume remains high at 4.7 million shares. This suggests that the response to conflicting inflation data will be muted.
Additionally, Citi analysts blame recent price increases in the US on short-term factors like portfolio management fees and dental services. Despite a 0.32% monthly increase in core PCE, the bank thinks the Fed won’t be concerned. They still predict that if disinflation persists, rates will be lowered in September.
Can Cooling Services Inflation Ease Central Bank Pressure?
Citi notes that since January 2022, categories like home furnishings have seen the biggest increases. They see little inflation spillover, but this indicates tariff pass-through. Additionally, as product inflation seems distinct and services inflation slows, market sentiment stays stable.
Crucially, primary and owner’s equivalent rents are now increasing at pre-COVID levels, indicating a reduction in housing pressures. Therefore, Citi believes there is a chance for rent reductions. This would help keep inflation under control during the coming months. ECB interest rates are predicted to decline, bringing the world’s monetary paths back into alignment.
The VXX’s quiet movement shows that investors are confident that recent data won’t derail plans for rate cuts. Citi anticipates “tariff-related inflation to remain modest and contained,” allowing central banks to take action. Additionally, the September window may be crucial for the ECB.
Will the ECB Interest Rates Be Cut Again Soon?
The European Central Bank is probably going to keep using data and keep a careful eye on inflation trends. Future decisions may be influenced by the escalation of trade tensions between the US and the EU. A stronger euro or increased energy prices could also make further easing more difficult. Markets will look to the ECB’s next communications and updated economic forecasts for clarification.
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