Eurozone inflation close to target, but divisions are growing within the ECB Governing Council

The European Central Bank is expected to leave interest rates unchanged today (with the reference rate at 2,15%). Investors currently price in a less than 30% chance of another rate cut this year, reflecting the ECB's cautious approach to incoming economic data. The main currency pair, EUR/USD, is currently trading below 1,17..

Maintaining interest rates at their current levels is justified by the stabilization of inflation. In August CPI index reached 2,1% year-on-year, and core inflation remained unchanged at 2,3% for the fourth month in a row. The central bank's forecasts indicate that inflation should return to the target in the medium term, while new macroeconomic projections assume a gradual acceleration of economic growth and achieving the 2% inflation target in 2026.

The eurozone economy is showing resilience to external factors, such as US tariffs introduced by Donald Trump or political tensions in FranceThe latest data from Germany shows improved business activity and business sentiment, which have reached their highest levels since 2022.

Divisions are growing within the ECB Governing Council

W Governing Council of the ECB However, there is a visible division of positions. Isabel Schnabel takes a more hawkish approach, warning that inflationary pressures could rise again due to international trade and fiscal expansionMadis Müller and Olli Rehn adopt a measured stance, emphasizing the need to monitor further data. Meanwhile, Lithuania's Gediminas Simkus is dovish, suggesting a rate cut as early as December if the euro strengthens or Asian import prices fall. Slovenia's Primoz Dolenc remains one of the few who doesn't rule out a possible rate hike, but not until 2026.

Risk factors for the ECB include the expected Fed decision to cut interest rates, which could strengthen the euro and force a reaction from Frankfurt.The political crisis in France following the resignation of Prime Minister François Bayrou also remains an unknown, accompanied by problems with the budget deficit and rising debt servicing costs – currently higher than in Italy. President Christine Lagarde has remained circumspect in this context, avoiding any announcements of potential crisis measures.

The ECB is maintaining its "wait and see" strategy. Inflation remains close to its target, and the eurozone economy is relatively resilient to external stresses. The lack of clear signals for further monetary easing suggests the central bank will proceed cautiously, maintaining flexibility in the face of potential changes in the euro exchange rate and rising fiscal risks, particularly in France.

Source: Krzysztof Kamiński, OANDA TMS Brokers