TLDR:
- ECB policymakers are indicating a likely interest rate cut in October
- Several officials support back-to-back cuts in October and December
- Market expectations for an October rate cut have increased significantly
- Slowing inflation and weak economic growth are driving the case for cuts
- Some policymakers remain cautious due to geopolitical tensions affecting energy costs
The European Central Bank (ECB) is poised to consider another interest rate cut at its upcoming meeting on October 17, according to recent statements from several policymakers.
This potential move comes in response to a weakening economy and a faster-than-expected slowdown in inflation across the eurozone.
French central bank chief Francois Villeroy de Galhau stated that a rate cut is “very likely” and added that it “will not be the last one.”
He explained that the pace of future cuts would depend on the progress in controlling inflation. This sentiment was echoed by other ECB officials, including Greek central bank chief Yannis Stournaras, who supported the idea of consecutive rate cuts in October and December.
The ECB has already implemented two rate cuts earlier this year, and financial markets have now priced in a nearly 90% probability of another 25 basis point reduction to the current 3.5% deposit rate. This shift in expectations has been dramatic, rising from near zero after the September meeting to almost certainty in recent weeks.
The case for a rate cut is bolstered by recent economic data. The eurozone economy has been stagnating for most of the past year, with signs of a softening labor market and slowing wage growth.
Importantly, inflation has fallen more rapidly than the ECB had predicted, with the first reading below 2% in over three years recently recorded.
However, not all policymakers are fully convinced of the need for immediate action. Belgium’s Pierre Wunsch expressed that he was still undecided, citing conflicting factors such as weak growth but persistent domestic inflation.
He also noted that recent geopolitical tensions have pushed energy costs higher, adding another layer of complexity to the decision-making process.
The ECB’s potential move towards looser monetary policy reflects a delicate balancing act. On one hand, there’s a need to support the struggling economy and respond to easing inflationary pressures. On the other, the bank must remain vigilant about potential inflationary risks and the impact of global events on energy prices.
Financial investors are now anticipating a series of rate cuts, with expectations that the ECB’s deposit rate could fall to 3% by the end of the year and potentially reach 2% by the end of 2025. This 2% level is considered by many in the financial community to be the “neutral rate” – a level that neither stimulates nor slows economic growth.
The upcoming October meeting will be closely watched by market participants and economists alike. If the ECB does proceed with a rate cut, it would signal a significant shift in the bank’s policy stance and could have far-reaching implications for the eurozone economy.
Policymakers have emphasized that any moves will be made with caution. Villeroy noted that the ECB is “used to acting with gradualism, which means resolutely but without making too significant steps.”
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