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ECB Anticipates Rate Cuts as Eurozone Inflation Falls: Economic Stagnation and Future Projections

 

As inflation in the Eurozone eases towards the target level and the region's economy shows clear signs of deterioration, markets expect faster monetary easing from the European Central Bank (ECB).  


Preliminary readings of September's inflation, released at the beginning of the month, revealed that inflation in the Eurozone rose by 1.8% across all items, marking the first time since 2021 that inflation has fallen below the ECB's target. Moreover, the core index, which excludes food and energy, increased by 2.7%, it continued to soften. 


Meanwhile, economic activity data from the region highlights the persistence of stagnation. Second-quarter growth figures showed that the region’s economy grew by only 0.2%, falling short of earlier forecasts. Annual growth came in at 0.6%, significantly below the ECB’s 2024 projection of 0.9%.  


Additionally, factory orders in Germany, the region’s largest economy, fell short of all forecasts last week. August orders dropped by 5.8%, marking the largest decline since the beginning of the year. Economists predict that Germany’s economy will shrink by 0.2% this year rather than stagnating, fueling pessimism about the region’s economic outlook. 


As inflation continues to ease in the Eurozone, concerns over economic growth and a potential deterioration in the labor market are growing. This fuels expectations that the ECB will quickly lower interest rates to support the economy pressured by high interest rates. Markets will be closely watching the ECB’s penultimate meeting of the year, scheduled for October 17. 

 


ECB on Course for Further Rate Cuts: Markets Eye 25 Basis Point Move 


At its monetary policy meeting on September 18, the ECB cut the deposit facility rate (DFR) by 25 basis points, bringing it down to 3.5%. The main refinancing operations (MRO) rate at which banks can borrow from the ECB for one week or three months, was lowered to 3.65%, narrowing the difference with the DFR to 15 basis points. The marginal lending facility (MLF) rate, the overnight borrowing rate for banks, was also reduced to 3.9%. 


 

Following the latest data, the market is now pricing in 48 basis points of rate cuts from the ECB for the remainder of the year. Markets expect a quarter-point rate cut at the October 17 meeting, followed by another cut at the December meeting.  


If the ECB proceeds with the anticipated 25 basis point cut on Thursday, the DFR, MRO, and MLF rates will fall to 3.25%, 3.40%, and 3.65%, respectively. 

 


ECB Officials Signal Mixed Views on Upcoming Rate Cut Decision 


In the final stretch, while some ECB policymakers supported the potential rate cut in October, others preferred a cautious approach.  


Governing Council member François Villeroy de Galhau stated that such a move is "very likely" next week, and several other officials have signaled that they are open to considering it.  


In contrast, Governing Council member Robert Holzmann emphasized that declaring victory over inflation too early is risky, while Governing Council member Peter Kazimir warned that decisions should not be based on just one good figure. 


As headline inflation declines, the persistence of sticky service prices and concerns that ongoing geopolitical tensions could reignite inflation have led some policymakers to remain cautious. However, the current economic picture in the region fuels expectations that the ECB will continue cutting rates, adding pressure on the common currency, the euro. 


On the other hand, as Governing Council member Bostjan Vasle highlighted recently, even if the ECB delivers the expected rate cut on Thursday, this will not guarantee an additional rate cut in December. Therefore, markets will be closely watching President Christine Lagarde's signals about the future policy path after the decision. Any move or statement that undermines rate cut expectations could help ease the pressure on the euro, while the opposite scenario would justify current pricing. 

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