Centeno leaves with the ECB taking back control of the euro

The European Central Bank (ECB) has lost its biggest 'dove,' that is, its advocate of a more expansionary (dovish) monetary policy with lower interest rates. This was Mário Centeno's last meeting representing Portugal at the ECB's headquarters in Frankfurt. Now, Italy's Fabio Panetta and Greece's Yannis Stournaras lead the ranking of governors considered most dovish. The governor of the Bank of Portugal's departure comes as the cycle of interest rate cuts ends and inflation is under control. The timing is coincidental, of course, but it's still the best possible moment in recent years to leave Frankfurt. On the other hand, the euro's second-largest economy, France, is under pressure. By January 2024, Mário Centeno was already advocating for interest rate cuts to stimulate the eurozone economy. At the time, the ECB left rates unchanged for the third consecutive meeting, after 10 consecutive rate hikes, reaching a record 4% deposit rate (currently 2%). But it would be necessary to wait until June 2024 for the ECB to begin its rate cuts. The beginning was difficult, but it culminated in eight cuts within a year. On the 'hawks' side, the Slovak Peter Kazimir, the Germans Isabel Schnabel and Joachim Nagel, the Dutchman Olaf Sleijpen or the Austrian Martin Kocher (who recently replaced the ultra-hawk Robert Holzmann) who defend a more restrictive monetary policy (hawkish), according to the “Econostream” ranking.

Now it remains to be seen how Álvaro Santos Pereira will position himself. His first meeting in Frankfurt will take place on October 30th, where he will have voting rights.

France's hot topic At Thursday's meeting, the hot topic was the situation in France. The ECB president began by saying she wouldn't comment on individual countries, but she couldn't resist issuing several warnings to Paris. "I am confident that policymakers will be able to reduce uncertainty," he began by saying at his usual press conference explaining the central bank's decisions. She also emphasized the importance of complying with European fiscal rules. "I'm sure all governments want to operate within this budgetary framework," she stated. When asked whether the ECB planned to intervene in the market to buy French debt and cool interest rate hikes, she responded that "eurozone bonds are performing well and have good liquidity." "Our focus is price stability, but we need financial stability, which requires a well-functioning monetary transmission mechanism. We have all the necessary tools if this transmission proves insufficient across the eurozone," said Christine Lagarde. The ECB announced a pause in interest rate cuts for the second consecutive meeting, and the suspension is set to continue. "The disinflation process is over," said the ECB leader. The eurozone is in a "good position," with inflation (2%) where the ECB had predicted. "Inflation is currently hovering around the 2% target, and the Governing Council maintains its inflation forecast unchanged," according to the Frankfurt statement. Eurozone growth revised upwards The ECB's new projections are in line with its previous projections, presented in June. Inflation is projected at 2.1% in 2025, 1.7% in 2026, and 1.9% in 2027. Excluding food and energy, average inflation is expected to reach 2.4% in 2025, 1.9% in 2026, and 1.8% in 2027. The eurozone economy is expected to grow 1.2% in 2025, an upward revision compared to June (0.9%). The projection for 2026 was lowered to 1.0%, with the projection for 2027 remaining unchanged at 1.3%. "The Council is determined to ensure that inflation stabilizes at the 2% target over the medium term," according to the statement, which guarantees that future decisions will be "data-dependent" and "meeting by meeting" to determine the "most appropriate monetary policy." The Governing Council's decisions "will be taken based on an assessment of the inflation outlook and risks, in light of financial and economic data, as well as underlying inflation dynamics and the strength of monetary policy transmission. The Governing Council is not committing to any particular rate path." Analysts believe the ECB's interest rate cutting cycle is over for now. The OCB "is on the fence—which isn't particularly comfortable, but it's preferable to falling on the wrong side. Inflation remains high, while growth is sufficiently resilient," said Roelof Salomons of BlackRock. "Another cut this year seems unlikely. (...) Markets are still pricing in the ECB remaining at 2% until the end of the year, and the hurdle for another cut is quite high," he noted. For Ebury analyst Michał Jóźwiak, "another interest rate cut is no longer the baseline scenario, with markets pricing in less than one in five chances of this happening in 2025."

The analyst believes the cycle of cuts is "over," unless it is proven that US tariffs "are having a significant enough impact on the eurozone economy that the ECB would consider further easing. We consider this unlikely, especially given that Germany's massive fiscal stimulus program is expected to boost growth next year."

End of relief or pause? Aberdeen's Luke Bartholomew wrote that the most pressing issue is whether the ECB "has finished easing or is pausing briefly before making further cuts in the future," with economic forecasts suggesting the cuts are over. In the future, the ECB's next move could even be a rate hike rather than a cut, he estimates. For Carsten Brzeski of the Dutch bank ING, there are still downside risks to inflation, which leaves the "door open for another cut." Although the "target for another cut is very high, we cannot completely rule out the possibility that the ECB will be forced" to act "in the coming months." "There are valid arguments that could force the central bank to cut in the coming months," such as the trade agreement with the US, whose expected tariffs could be higher if certain points are not met, or inflation below 2%. For her part, Irene Lauro of Schroders believes that the easing cycle is over. "With trade uncertainty receding, the eurozone's recovery will accelerate," helped by Germany's stimulus program and unemployment at a minimum.

The biggest risk now is political uncertainty, with France on the radar, but with the economy's resilience and strong domestic demand, the ECB "can afford to keep monetary policy unchanged," he concluded.