In a speech today, ECB Executive Board member Isabel Schnabel noted the ongoing challenge of “sticky” services inflation, which continues to keep headline inflation elevated. She highlighted that price pressures within the services sector are “broad-based and global,” and that the momentum remains high, well above levels that would be consistent with price stability. This persistent inflation in services is a key concern for the ECB’s outlook.

However, there is some optimism regarding easing wage pressures. Schnabel pointed to expectations that wage growth will slow as the effects of past price shocks begin to fade. Additionally, firms are projecting moderation in selling price increases, as “profit margins buffer higher wages”. She also noted that while demand for services has remained resilient, there are signs it is beginning to soften.

Schnabel also addressed the risks posed by geopolitical uncertainty, stating that it continues to be a significant factor influencing inflationary pressures. She cautioned that inflation perceptions remain high, which makes inflation expectations more “fragile to new shocks.”

Full presentation of ECB’s Schbabel here.

ECB Governing Council member Martins Kazaks indicated that after two rate cuts this year, “this is not the final destination.” Borrowing costs remain “pretty restrictive”, and “these rates will continue to go down,” he added.

Kazaks noted that the speed of these rate cuts will largely depend on the path of services inflation and the broader outlook for Europe’s struggling economy.

“If we look at what financial markets expect — and I don’t have any serious reason not to agree with them — then by the middle of next year, rates are expected at 2.5%,” he added.

ECB Chief Economist Philip Lane provided insight into the central bank’s inflation expectations in a speech today. In the near term, headline inflation is anticipated to fluctuate, with a temporary dip in September followed by a rebound later this year.

But more significantly, ECB projects a “rapid decline” in inflation over the next two years, from 2.6% in Q4 2024 to 2.0% in Q4 2025. Core inflation, which is primarily driven by services, is expected to follow a “even sharper” drop, falling from 2.9% at the end of this year to 2.1% by the same period in 2025.

The projections align with weaker economic growth and declining wage pressures, both of which are expected to accelerate the disinflationary process throughout 2025. Lane noted that this slowdown in wage growth is consistent with the recent data, reflecting the end of the “catch-up” dynamics seen in recent years. Additionally, the disinflation process will be supported by well-anchored forward-looking inflation expectations, with reduced price-price and price-wage dynamics compared to the higher inflation environment of 2023.

Looking forward, Lane emphasized that a “gradual approach” in reducing policy restrictiveness will be appropriate, provided the data aligns with ECB’s baseline projection. However, he cautioned that the central bank will “retain optionality” about the pace of adjustment, indicating flexibility depending on future economic developments.

Full speech of ECB’s Lane here.

ECB Governing Council member Peter Kazimir expressed his cautious stance regarding future rate cuts, noting in a blog post that “We will almost surely need to wait until December for a clearer picture before making our next move.”

Kazimir also underscored the importance of receiving a “significant shift” or a “powerful signal” in the economic outlook to support backing another cut in October.

However, “the fact is that very little new information is in the pipeline” before October meeting, he added.

The Governing Council member argued that it is essential for the central bank to ensure incoming data aligns with projections, warning that acting too quickly could lead to regret if inflation has not been sustainably brought under control.