

Market Analysis
Policymakers at the European Central Bank (ECB) are increasingly divided on the growth outlook, a disagreement that could influence the debate over future rate cuts for months. Some officials are concerned about a possible recession, while others remain focused on persistent inflation pressures, according to sources close to the discussions.
After cutting interest rates in June, the ECB is widely expected to ease further in September due to slowing price growth. However, sources indicate that policy decisions will become more complex as the eurozone economy enters a more fragile phase.
The central debate revolves around how weakening economic growth and a potential recession will affect inflation—the ECB's primary target—as the bank aims to reduce inflation to 2% by the end of 2025.
Although much of the discussion occurs behind closed doors, sources familiar with the situation reveal differing opinions.
An ECB spokesperson declined to comment.
The more dovish policymakers, still in the minority, believe the economy is weaker than anticipated, with rising recession risks and a softening jobs market as firms begin to reduce vacancies.
As employment declines, disposable income decreases, leading to a drop in consumption and potentially triggering a self-reinforcing downturn.
"This could reduce price pressures faster than currently forecast, making the risk of inflation falling below target quite real," said one source, who wished to remain anonymous.
This perspective suggests the central bank may be slow in cutting interest rates to support the economy, strengthening the argument for quicker rate reductions.
Inflation, which fell to 2.2% in August, is expected to rise again towards the end of the year, only reaching the 2% target by late 2025.
RECESSION?
Conversely, the more conservative policymakers, or hawks, who have led the debate since the rapid rate hikes began in 2022, argue that actual growth has consistently exceeded weak survey predictions, indicating the economy is holding steady.
They point to robust consumption, a successful tourism season, and a rebound in construction as signs of respectable growth.
Moreover, with wage growth significantly above levels consistent with a 2% inflation target, real incomes are recovering quickly and should continue to support the economy.
While the industrial sector is in a deep downturn, potentially pushing Germany into a recession, hawks view this as a structural issue that monetary policy cannot address.
This strengthens the case for gradual rate cuts, perhaps one per quarter, until the ECB is confident that inflation is on track to reach 2%.
Hawks are also likely to resist any policy easing that would delay the inflation target beyond 2025, as this could undermine the ECB's credibility.
ECB board member Isabel Schnabel, a leading policy conservative, emphasized the importance of prioritizing inflation concerns over growth.
"Monetary policy should remain focused on bringing inflation back to our target in a timely manner," she said in a recent speech. "While risks to growth have increased, a soft landing still seems more likely than a recession."
OCTOBER
The division is unlikely to affect the September policy decision, as there is broad consensus to cut rates, according to the sources.
However, it could influence how ECB President Christine Lagarde communicates the decision, particularly in shaping expectations for the October meeting.
While the bank is expected to maintain its "meeting by meeting" approach to policy, doves want Lagarde to highlight the risks to growth and signal that consecutive rate cuts are possible.
Hawks, on the other hand, worry that such a message could raise market expectations too much, creating a dilemma for the ECB. Investors currently see a 40% to 50% chance of an October cut, and a dovish message could solidify those expectations.
"I believe quarterly cuts are appropriate, and the data doesn't support increasing this pace," a third source noted.
While the policy statement will be agreed upon by the governors, Lagarde has some discretion in delivering the message and can choose to emphasize certain aspects.
Economists also have mixed views on the outlook, with most agreeing that it remains uncertain.
"Even if the U.S. avoids a recession, Europe might not," said Macquarie strategist Thierry Wizman.
Wizman pointed out that weak demand from China for European goods exacerbates the downturn, while the rise of the far right in France and Germany could also negatively impact consumer sentiment.
Meanwhile, ABN Amro predicts continued, though modest, growth.
"The eurozone's economic recovery is struggling to gain momentum," ABN Amro stated. "The high savings rate suggests consumers are hesitant to spend real income gains, particularly in France, the Netherlands, and Germany."
Paraphrasing text from "Reuters" all rights reserved by the original author.