HSBC's Outlook on the European Central Bank's September Interest Rate Decision: Expected to Hold Steady but Maintain a Dovish Stance

According to the Zhitong Finance APP, the European Central Bank will announce its latest interest rate decision on September 11. HSBC released a research report providing a forward-looking perspective, indicating that the European Central Bank will remain on hold again. However, given the anti-inflation situation and the potential risks of falling below the 2% target, HSBC expects the European Central Bank to maintain a dovish stance; although it appears to "deliberately not disclose too much information," its policies still carry a mild inclination. Furthermore, HSBC believes that despite the strengthening euro, the forecast adjustment will be limited.

HSBC expects the European Central Bank to keep interest rates unchanged on September 11, which aligns with its long-standing view and current market expectations. Any change in the policy rate would be a significant surprise. Since the July meeting, economic data has shown a mixed picture. The August PMI was slightly better than market expectations, the second quarter GDP grew by 0.1% quarter-on-quarter (although this data may be revised downward), and the inflation data for July slightly exceeded general market expectations. On the other hand, trade data from June showed signs of an export rush effect, and the announcement of a confidence vote by the French government increased political uncertainty. The trade agreement between the EU and the US provided some clarity (despite tariffs being at 15%), but certain uncertainties regarding the details still exist.

In July, the European Central Bank maintained the key deposit rate at 2.0%, within its estimated neutral rate range. ECB President Christine Lagarde emphasized that "we are currently in a good state" (with no intention of further rate cuts, July 24). This further confirmed the earlier remarks by ECB Executive Board member Isabel Schnabel, who stated that "the threshold for another rate cut is very high." Given this tone, the current data seems insufficient to prompt a change in policy stance in September. HSBC expects that the ECB staff's forecasts in September will not change significantly, and there will not be any circumstances sufficient to prompt a policy adjustment. However, since June, there have been several signs of anti-inflation, such as the appreciation of the euro and US tariffs on the EU being slightly higher than the ECB's predicted baseline scenario level. Nevertheless, given the moderate forecasts from June, HSBC believes that inflation predictions will not be revised downward.

Even so, over the next year, the inflation rate is still very likely to remain below the ECB's set target of 2%, only barely reaching this target by 2027. Additionally, any further appreciation of the euro, the ongoing impact of tariffs, and the execution risks of fiscal plans could adversely affect the inflation rate. However, HSBC expects no clear guidance in September. The minutes from the July meeting emphasized the need for a "cautious, neutral tone" and "deliberately not disclosing any information regarding future interest rate decisions." Nevertheless, the risk of persistent inflation being below the target (which may become apparent in December) points to a dovish inclination.

Lagarde may also be asked about the situation in France and whether the ECB could use its Transmission Protection Instrument (TPI) if necessary. HSBC believes she will avoid the question by stating that it is too early to discuss this issue. The difficulty lies in the fact that the purpose of the TPI is to address the deterioration of financing conditions "not caused by the specific fundamentals of individual countries," which is clearly not the case in France at present