The European Central Bank is expected to cut interest rates again this week as inflation concerns recede in the euro zone and worries about slowing growth grow.
Inflation fell to 1.8% across the 20 euro zone countries in September, falling below the ECB's 2% target for the first time since 2021.
Interest rates are expected to rise again towards the end of the year, but there is a growing feeling that consumer prices are back under control.
“Victory against inflation is in sight,” French central bank governor François Villeroy de Galhau, a member of the ECB's rate-setting board, said last week.
“Reductions are very likely,” he told France Info Radio, adding: “This will not be the last.”
ECB policymakers will meet in Slovenia on Thursday to decide whether to cut further or increase the pace of rate cuts. The central bank is headquartered in Frankfurt, but sometimes holds monetary policy meetings in other parts of the eurozone.
The central bank has already cut interest rates twice from a peak of 4%, once in June and again at its previous meeting in September.
In both cases, the ECB cut interest rates on deposit schemes by 25 basis points, leaving the benchmark interest rate unchanged at 3.5%.
But Frédéric Ducrozet, chief economist at Pictet Wealth Management, said new data showing price pressures and weak economic activity confirmed the impression that “policy rates are too restrictive in the euro area.” Ta.
“Progress”
The ECB raised interest rates even faster than before in response to a spike in inflation caused by the lifting of lockdowns due to the coronavirus pandemic and Russia's invasion of Ukraine.
Efforts to raise borrowing costs and slow the pace of rise in consumer prices have had an effect. The ECB's efforts to curb inflation are “making progress”, President Christine Lagarde said last month.
Lagarde told the European Parliament that recent economic data “reinforced our confidence that inflation will return to target in a timely manner.”
He said the ECB would “consider the new figures at its next monetary policy meeting”.
In the name of being “data-dependent,” the ECB tends to move to the rhythm of its forecasts, which are updated at every meeting, with the next one scheduled for December.
Ducrozet said rate setters could be tempted to act “preemptively” to avoid suppressing growth too much, with another 25 basis point rate cut coming on Thursday. That's what I expected.
The ECB's outlook last month already showed eurozone growth slowing to 0.2% in the third quarter, with weak business morale further clouding the outlook.
Germany, the region's largest economy, is also struggling to move forward, with the city of Berlin last week announcing that economic growth is expected to contract by 0.2% in 2024, marking the second straight year of recession. .
downside risk
ING analyst Kirsten Brzeski said “the risks are now clearly tilted to the downside” regarding economic growth.
However, Brzeski said the possibility of the ECB leaving interest rates unchanged in October “cannot be completely ruled out.”
Brzeski said the ECB would be “ahead of the curve” and do so “right before another economic disaster”.
But he said a quick response would still be “controversial” as authorities stressed the need for a gradual transition.
Brzeski said the threat that oil prices could rise again due to escalating conflicts in the Middle East was also a factor that could hold the ECB's hand.
Whatever the decision, observers will be listening closely to Lagarde's press conference for hints about what the ECB will do next.
Analysts at HSBC Bank said: “Inflation is coming down, but it's not going away.''
They said that even if interest rates were cut on Thursday, the ECB would “not commit in advance to further rate cuts” and would “express caution about the future path of interest rates.”
