Eurozone inflation is below target and the European Central Bank (ECB) is likely to accelerate rate cuts. On Wednesday, ECB Governing Council member and Latvia's Central Bank Governor Martins Kazaks suggested that recent data clearly point towards a rate cut.
Kazakhstan noted that economic risks, particularly in the domestic services sector, remain significant and are offset by a trend towards weak growth. He expects interest rates to be lowered further after October, but urged caution due to geopolitical risks and the upcoming U.S. presidential election.
ECB Vice President Luis Deguindos also stressed that short-term economic growth in the euro zone may be weaker than expected, but should accelerate later. He cited rising real incomes and the unwinding of the effects of restrictive monetary policy as factors that could support consumption and investment. Guindos stressed that the recovery should be based on productivity growth, which has been particularly weak since the pandemic began.
Eurozone inflation fell below the 2% target in September for the first time since 2021, according to recent data. ECB President Christine Lagarde has given a clear signal about future interest rate cuts, expressing confidence that inflation will fall to the 2% target.
With economic growth slowing and inflation falling, markets expect the ECB to cut interest rates sooner than expected. The ECB's next interest rate decision is scheduled for October 16-17. The ECB cut interest rates by 25 basis points for the first time in June, followed by another 25 basis point cut in September. Currently, the main refinancing rate, marginal lending rate and deposit rate in the euro area are 3.65%, 3.90% and 3.50%, respectively.
There is a 90% chance of a third rate cut at the next meeting. Wall Street's biggest firms adjusted their expectations accordingly. Citigroup expects a 25 basis point rate cut in October, with further cuts in December and early 2025, setting the policy rate at 1.5% by September 2025. Bank of America (BofA) also revised its forecast and now expects the next rate cut to occur in October instead. of December. BofA expects continued cuts to bring deposit rates to 2% by June 2025, and further cuts to reduce deposit rates to 1.5% by September 2025, six months earlier than previously expected. .
