Lagarde Hints ECB Might Hold Off on October Rate Cut, Eyes December Move Instead

European Central Bank (ECB) President Christine Lagarde has suggested that while the ECB remains open to cutting interest rates in October if the economic situation deteriorates significantly, December appears to be the more likely timing for the next move. This insight comes after the ECB implemented its second quarter-point reduction in the deposit rate since June.

Lagarde’s comments provide the clearest signal yet that policymakers are inclined to hold off until more comprehensive data becomes available in December, although they remain flexible to act sooner if necessary. The ECB has vowed to base decisions on incoming data, leaving the door open to an October cut should economic conditions worsen.

“If there is a significant change relative to our baseline, we will reassess,” Lagarde told reporters in Budapest, after attending a meeting with euro-area finance ministers.

Other ECB officials have similarly emphasized a cautious approach. France’s Francois Villeroy de Galhau, for example, highlighted the need for a gradual pace, saying, “We’re not pre-committing to any particular rate path, and we keep our full optionality for our next meetings.”

The ECB’s current strategy follows June’s first rate cut in response to inflation easing to within sight of the bank’s 2% target. Despite this progress, the ECB is grappling with mixed signals from the economy. Some policymakers remain concerned about lingering inflationary pressures in the services sector, while others worry that weakening economic conditions could lead to inflation falling short of the target.

Latvia’s Martins Kazaks voiced similar sentiments, suggesting that the probability of an October rate cut is slim—around 25% according to market expectations. He emphasized, however, that if the economy faces unexpected challenges, the ECB could reconsider its position.

“We need strategic patience,” said Lithuania’s Gediminas Simkus, stressing that while inflation is calming, further rate cuts will depend on incoming data. Austria’s Robert Holzmann indicated that December is more likely for another quarter-point move, as he believes the ECB will need additional data before making a decision in October.

Expanded Analysis:

For investors, this policy environment creates an opportunity. While the ECB seems cautious about an October move, the potential for a December cut provides a clearer timeline for planning. If the ECB holds rates steady in October, investors might anticipate a more significant market reaction in December, should the rate cuts come through. In this context, traders could position themselves in anticipation of further monetary easing, potentially capitalizing on movements in the bond markets or shifts in the euro.

Given the ECB’s data-driven approach, economic releases between now and December will play a critical role in shaping market expectations. Investors will need to keep a close eye on inflation figures and economic growth data to better gauge the likelihood of future cuts.