FRANKFURT, Sept 2 (Reuters) – Policymakers at the European Central Bank (ECB) are increasingly split over the future of the euro zone’s economic growth, a divide that could significantly influence upcoming decisions on interest rate cuts. With some members concerned about the growing risk of a recession, while others focus on persistent inflationary pressures, the debate is likely to shape the ECB’s monetary policy in the months ahead, according to sources familiar with the discussions.
In June, the ECB cut interest rates, and another reduction is expected in September, driven by a slowing pace of price growth. However, sources indicate that future policy decisions will become more complex as the euro zone’s economic outlook grows more uncertain.
At the heart of the debate is how a potential recession could affect inflation, which the ECB aims to reduce to 2% by the end of 2025. While much of the discussion is private, insiders with direct knowledge of the situation reveal that opinions are sharply divided.
A spokesperson for the ECB declined to comment on the matter.
Diverging Views on Economic Outlook
The ECB’s policy doves, who are in the minority, argue that the economy is weaker than anticipated, with recession risks increasing. They point to firms reducing job vacancies as evidence of a softening labor market. According to one source, who requested anonymity, “This would weaken price pressures quicker than we now forecast, so I think the risk of returning to below-target inflation is real.” These doves believe the ECB may be behind the curve in cutting interest rates and argue for more aggressive rate reductions to support the economy.
On the other side, the hawks, who have dominated the policy debate since the rapid rate hikes began in 2022, maintain that the economy is more resilient than surveys suggest. They highlight robust consumer spending, a strong tourism season, and a rebound in construction as signs that growth remains respectable. Additionally, wage growth is seen as outpacing levels consistent with the 2% inflation target, supporting the argument for a cautious approach to further rate cuts.
Despite concerns about a downturn in the industrial sector, particularly in Germany, hawks view these issues as structural and unlikely to be resolved through monetary policy. They advocate for slow, measured rate cuts—potentially one per quarter—until inflation is clearly on track to meet the 2% target. These policymakers are also wary of any moves that could delay achieving the inflation goal beyond 2026, fearing it could undermine the ECB’s credibility.
Impact on Upcoming Policy Decisions
While the rift is not expected to affect the ECB’s September rate cut decision, it could influence how President Christine Lagarde communicates the bank’s stance. Although the ECB is unlikely to abandon its “meeting by meeting” policy approach, some doves are pushing for Lagarde to emphasize growth risks and keep the door open for consecutive rate cuts.
However, hawks caution that such messaging could heighten market expectations, complicating the ECB’s position. Currently, investors see a 40% to 50% chance of an October rate cut, and a dovish signal could solidify those expectations. As one source noted, “I think quarterly cuts serve us well, and the data just don’t support picking up this pace.”
While the ECB’s governors will likely agree on the formal policy statement, Lagarde has some flexibility in how she delivers the message, potentially shaping market expectations for the October meeting.
Mixed Economic Outlook
Economists are also divided on the euro zone’s prospects. Some, like Macquarie strategist Thierry Wizman, warn that Europe might struggle to avoid a recession, especially with weak demand from China and rising political instability in key countries like France and Germany. Others, such as ABN Amro, foresee continued but sluggish growth, noting that high savings rates suggest consumers are hesitant to spend their income gains, particularly in France, the Netherlands, and Germany.
Source: Reuters
