The ECB's autumn dilemma: cutting without reigniting prices

Interest rate futures have spent weeks pricing in a resumption of ECB rate cuts before year-end. Core inflation, however, has yet to offer the confirmation the Governing Council would need to act comfortably.

A services core that won't give ground

The services component of core inflation remains the main obstacle. Unlike industrial goods, where disinflation has progressed more clearly, services prices continue to show resistance tied to wage growth, still running above levels the ECB considers compatible with its medium-term 2% target.

This resistance isn't confined to one country: it appears broadly across the eurozone's main economies, which rules out a one-off statistical effect and reinforces the Governing Council's caution.

Markets are ahead of the data

The gap between what money markets are pricing and what the latest data suggest isn't new, but it has widened in recent weeks. That divergence tends to resolve in one of two ways: either the market scales back its expectations for the number of cuts, or the data eventually confirms the improvement markets are already anticipating. Which scenario prevails will depend heavily on the path of energy costs we analyse in our piece on the energy bill and European inflation: a sustained rebound in gas and crude would complicate precisely the scenario markets are taking for granted.

The voices inside the Council

Public remarks from Governing Council members reflect the usual split between growth-leaning and credibility-focused voices. What stands out this cycle is that both camps cite the same data points — sticky services, the recent energy rebound — to justify opposite positions: one side sees reason to wait, the other treats it as transitory noise that shouldn't hold back rate normalisation.

What to watch before the next meeting

• September and October core HICP: any downside surprise in services would strengthen the case for a cut.
• Fourth-quarter wage negotiations: end-of-year collective bargaining will set the wage tone for 2027.
• Services PMI: the prices-charged subcomponent remains the market's most closely watched signal.
• ECB communication: language on upside inflation risks, more than the decision itself, will move expectations.

Autumn is shaping up as the moment the ECB has to decide whether to act on the data it has, or the data markets expect to arrive.

Sources

• European Central Bank, macroeconomic projections
• Eurostat, services price index
• Money market curves, rate expectations