The European Central Bank (ECB) is anticipated to announce a significant rate cut this Thursday, 17 October, due to falling inflation and deteriorating economic conditions across the Eurozone. With inflation dropping to 1.8% in September and concerning PMI data indicating stagnation, the central bank is compelled to contemplate easing its monetary policy.
In its last meeting, the ECB had already decreased its deposit facility rate by 25 basis points, hinting at the possibility of further adjustments moving forward. ECB President Christine Lagarde underscored the importance of a data-driven approach, indicating that future decisions would rely heavily on economic indicators.
Concerns About Economic Recovery Grow
Recent minutes from ECB meetings highlight rising concerns among policymakers regarding the fragility of the Eurozone’s economic recovery. The outlook for growth appears increasingly bleak, suggesting that the ECB may need to adopt a more dovish stance in light of these challenges.
Economic data continues to support the notion that inflation could return to the ECB’s target of 2% by the end of 2025, providing further justification for potential rate cuts. In September, the Eurozone’s annual inflation rate dropped to 1.8%, the lowest level recorded since April 2021, down from 2.2% in August. This decline was primarily fueled by a downturn in energy prices, although core inflation—which excludes volatile categories such as energy and food—remained stubbornly high at 2.7%.
In addition, the HCOB Eurozone Composite PMI has fallen below the 50-point mark, indicating a contraction in private sector activity for the first time since February. The manufacturing sector has been experiencing a recession for 27 consecutive months, and the boost in services activity attributed to the Summer Olympics in France has diminished.
Dr. Cyrus de la Rubia, the chief economist at Hamburg Commercial Bank, remarked on the Eurozone’s precarious situation: “The eurozone is heading towards stagnation. With new orders and order backlogs rapidly declining, further weakening of the economy seems inevitable.”
ECB Policymakers Open to Rate Cuts
Recent remarks from several ECB officials indicate a strong expectation of additional rate cuts this October. Christine Lagarde has acknowledged the possibility of acting before inflation fully hits the 2% target, especially as recovery struggles intensify.
Greek central bank governor Yannis Stournaras explicitly suggested that interest rates could be lowered sooner than anticipated, calling the current high rates “highly restrictive.” He emphasized that confidence indicators are teetering on the brink and acknowledged that inflation is declining faster than the ECB had forecasted in September.
Similarly, François Villeroy de Galhau, the governor of the French central bank, indicated that a rate cut is likely imminent. He stated, “An ECB rate cut is very probable, and it won’t be the last.” Executive board member Frank Elderson echoed this sentiment, adding that if inflation trends continue, a gradual easing of the ECB’s stringent policy stance is to be expected.
However, there are hawkish voices within the ECB, including Austrian central bank governor Robert Holzmann, who cautioned that the “fight against inflation is far from over.” Belgian central bank governor Pierre Wunsch also expressed reservations, arguing that a shift to a more accommodative rate path is not necessarily justified by weaker growth alone.
Analysts Predict More Aggressive Easing Measures
Market analysts are increasingly leaning towards anticipating swifter and more pronounced rate cuts. Economists from Bank of America, Ralf Preusser and Ruben Segura-Cayuela, have suggested that the ECB may cut rates “further than consensus expects.” They believe the decision will garner a strong majority, even if not unanimous.
Danske Bank analysts have likewise adopted a dovish outlook, arguing that the current weaker growth indicators and declining inflation bolster the case for another rate cut from the ECB. Economist Sven Jari Stehn of Goldman Sachs has likewise predicted a cut this October, citing a faster-than-expected deceleration in wage and inflation pressures compared to the September projections.
UBS economists foresee the ECB implementing rate reductions in October, December, January, and March, while Citigroup projects that cuts could extend through early 2025, potentially bringing the deposit rate down to 1.5% by September 2025. Nevertheless, some analysts, such as those at ING Group, remain skeptical about an immediate rate cut in October, suggesting such a move would mark a fundamental shift in the ECB’s policy focus from inflation control to stimulating growth.
Photo credit & article inspired by: Euronews
