The European Central Bank (ECB) is widely expected to cut interest rates for the third time this year, raising the policy rate to 3.25% today, as price pressures across the euro area rapidly ease. The move marks the first consecutive rate cut in 13 years as the ECB shifts its focus from curbing inflation to protecting economic growth.
The rate cut comes at a time when central banks around the world are pushing through easing cycles, a trend that is expected to continue and hurt returns on cash.
Slowing growth in the euro area could accelerate ECB policy easing. Eurozone inflation ended at 1.7% year-on-year in September, down from 2.2% in August and also below the ECB's estimate of 2.3% for the third quarter. The latest figures follow a series of modest inflation announcements by the region's major member states, raising the risk of further inflation in coming quarters. Furthermore, the latest corporate survey results suggest a significant slowdown in growth, which is likely to put the labor market under pressure. Although the ECB's mandate focuses solely on inflation, we believe policymakers may accelerate the pace of rate cuts in the coming months given the easing price pressures and economic weakness. Following today's rate cut, the ECB is expected to implement further rate cuts at each policy meeting until June 2025, for a total of 125 basis points.
The Fed still plans to cut rates further. Stronger-than-expected economic data released recently in the U.S. has sparked market debate over whether the Federal Reserve may hold off on cutting interest rates at its next two meetings. However, we continue to expect another 50 basis point rate cut by the end of this year and another 100 basis points in 2025. Recent comments from Fed officials suggest that inflation is “definitely” less weighted by individual data releases. You're heading in the right direction. ” Minutes from the Fed's most recent policy meeting also showed that policymakers acknowledged the restrictiveness of monetary policy.
The Bank of England and Asian central banks should also respond with further interest rate cuts. UK inflation slowed more than expected in September, with a headline figure of 1.7%, the lowest level since April 2021. Services inflation is still above the level desired by the Bank of England (BoE), but it is still moderating. We believe the central bank is on the verge of a second rate cut in November. Elsewhere in Asia, both South Korea and Thailand began interest rate cutting cycles this month, following similar moves by the Philippines in August and Indonesia last month. The Philippines is cutting rates by another 25 basis points this week, and Indonesia, the Philippines and Thailand are also expected to cut rates further by the end of the year.
Therefore, investors should avoid holding excess cash, money market holdings, and expired term deposits. We believe fixed income ladders, intermediate-term investment grade bonds, diversified fixed income strategies, and equity income strategies can all play a role in preserving portfolio returns.
