The ECB is expected to announce interest rate cuts on Thursday in response to falling inflation and worsening economic conditions. Eurozone inflation fell to 1.8% in September, but weak PMI data points to economic stagnation.
advertisementThe European Central Bank (ECB) is widely expected to announce a rate cut at its next board meeting on October 17, as worsening economic conditions and falling inflation force policymakers to consider further monetary easing. .
The ECB already cut deposit facility rates by 25 basis points in September, leaving room for future adjustments. ECB President Christine Lagarde stressed the importance of a data-driven meeting-by-meeting approach and said the ECB would continue to be guided by economic indicators.
However, minutes from the last meeting revealed growing concerns among ECB policymakers about the fragility of the eurozone's broader economic recovery. There is a growing view that risks to growth are increasingly tilted to the downside, raising expectations that the central bank will respond with more dovish policy.
Inflation and economic indicators show signs of weakness
Economic data reinforced confidence that inflation will return to the ECB's 2% target by the end of 2025, creating room for further easing.
The euro zone's annual inflation rate fell to 1.8% in September, the lowest level since April 2021 and below August's 2.2%. The decline was primarily driven by lower energy prices, but core inflation, which excludes volatile energy and food prices, remained solid at 2.7%, down slightly from 2.8%. Services inflation remains a key concern, running at 4.0% year-on-year.
Meanwhile, the HCOB Eurozone Composite PMI fell below the benchmark 50 points, indicating private sector activity is contracting for the first time since February. The manufacturing industry has been in recession for 27 months, and the revitalization of the service industry due to the French Summer Olympics has come to an end.
Dr Cyrus de la Rubia, Chief Economist at the Hamburg Commercial Bank, said: “The euro area is heading towards stagnation. Given the rapid decline in new orders and backlogs, we cannot foresee further weakening of the economy. It doesn't take much imagination.” . ”
ECB policymakers open to rate cuts
Recent comments from ECB policymakers have led the market to expect another rate cut in October. Lagarde said the headwinds to the economic recovery were growing and suggested the ECB could take action before inflation fully reaches its 2% target.
Greece's central bank governor, Giannis Stournaras, was more specific, suggesting interest rates could be cut sooner than expected.
He said the “very restrictive” interest rates would ease quickly given that “confidence indicators are on the verge of life and death” and that inflation is falling faster than the ECB expected in September. He said that there is a possibility that
Similarly, Francois Villeroy de Galhau, the governor of the French central bank, hinted that a rate cut was imminent, saying: “An ECB rate cut is very likely and will not be the last.” Governing Council member Frank Elderson added that if inflation continues on its current trajectory, the ECB will gradually ease its restrictive policy stance.
However, hawkish voices such as Austrian central bank chief Robert Holzmann warned that “the fight against inflation is not over yet.”
Belgian central bank governor Pierre Wunche shared the concerns, saying it was not clear whether slowing growth alone would justify changing the ECB's interest rate path.
Analysts expect more aggressive easing
Analysts at major investment banks are now increasingly favoring faster and deeper rate cuts.
advertisementBank of America economists Ralph Preusser and Ruben Segura-Cayuela suggested the ECB could cut rates “more than consensus expectations and markets are pricing in.” They predict that while the decision may not be unanimous, there will be a strong majority in favor of mitigation.
Danske Bank was also more dovish, saying that “weaker-than-expected growth indicators and lower inflation provide the basis for further ECB interest rate cuts.”
Goldman Sachs economist Sven Jari Steen said: “Future data shows that the slowdown in wage and inflation pressures is decelerating more rapidly than staff forecasts in September.'' We expected an interest rate cut in May.
He expects further adjustments will be made at the December and subsequent Governing Council meetings, and the ECB could reach a final interest rate of 2% by June 2025.
advertisementEconomists at UBS expect the ECB to cut interest rates at its October, December, January and March meetings. Similarly, Citigroup predicts rate cuts will continue into early 2025, with deposit rates falling to 1.5% by September 2025.
Still, not all analysts agree that a rate cut is imminent. The ING group expressed doubts that the ECB would act in October, arguing that such a step would represent a shift in the ECB's response function, moving from suppressing inflation to promoting growth.
