Will ECB deliver another interest rate cut at this week’s meeting?

The ECB is expected to announce a rate cut on Thursday, responding to falling inflation and worsening economic conditions. Eurozone inflation fell to 1.8% in September, while weak PMI data indicates economic stagnation.

The European Central Bank (ECB) is widely expected to announce a rate cut during its upcoming meeting on 17 October, as deteriorating economic conditions and declining inflation push policymakers to consider easing monetary policy further.

In September, the ECB already lowered its deposit facility rate by 25 basis points, leaving the door open for future adjustments. ECB President Christine Lagarde emphasised the importance of a data-driven, meeting-by-meeting approach, stating that the bank would remain guided by the economic indicators.

However, minutes from the previous meeting have revealed a growing concern among ECB policymakers about the fragility of the eurozone’s broader economic recovery. The risks to growth are increasingly seen as tilted to the downside, raising expectations that the central bank will respond with more dovish measures.

Inflation and economic indicators show signs of weakness

Economic data have reinforced confidence that inflation will return to the ECB’s 2% target by the end of 2025, providing further room for easing.

The eurozone’s annual inflation rate dropped to 1.8% in September, the lowest since April 2021 and below August’s figure of 2.2%. This decline was driven primarily by falling energy prices, although core inflation – excluding volatile energy and food prices -remained stickier at 2.7%, down slightly from 2.8%. Services inflation remains a key concern, running at 4.0% year-on-year.

Meanwhile, the HCOB Eurozone Composite PMI dipped below the 50-point threshold, indicating a contraction in private sector activity for the first time since February. The manufacturing sector has been in recession for 27 months, and the boost to services activity from the Summer Olympics in France has run its course.

Chief economist at Hamburg Commercial Bank, Dr Cyrus de la Rubia, commented: “The eurozone is heading towards stagnation. Considering the rapid decline in new orders and the order backlog, it doesn’t take much imagination to foresee a further weakening of the economy.”

ECB policymakers opened to a rate cut

Recent comments from ECB policymakers have steered markets to anticipate another rate cut in October. Lagarde has signalled that the ECB may act before inflation fully reaches the 2% target, noting that recovery headwinds are intensifying.

Greek central bank governor Yannis Stournaras was more explicit, indicating that interest rates could be reduced sooner than expected.

He stated that the “highly restrictive” rates could be eased quickly, given that “confidence indicators are just between life and death,” and inflation is falling faster than anticipated by the ECB’s September forecast.

Similarly, French central bank governor François Villeroy de Galhau suggested a cut was imminent, noting: “An ECB rate cut is very probable, and it won’t be the last.” Executive board member Frank Elderson added that if inflation continues on its current path, the ECB would gradually ease its restrictive policy stance.

On the other hand, more hawkish voices, such as Austrian central bank governor Robert Holzmann, cautioned that the “fight against inflation is far from over.”

Belgian central bank governor Pierre Wunsch shared his concerns, stating it was not clear that weaker growth alone justified a change in the ECB’s rate path.

Analysts expect more aggressive easing

Analysts from major investment banks are now increasingly in favour of quicker and more significant rate cuts.

Bank of America economists Ralf Preusser and Ruben Segura-Cayuela suggested that the ECB could cut “further than consensus expects and markets are pricing.” They anticipate that while the decision may not be unanimous, there will be a strong majority in favour of easing.

Danske Bank has also taken a more dovish stance, stating that “weaker-than-anticipated growth indicators, as well as a decline in inflation, support the case for another rate cut from the ECB”.

Goldman Sachs economist Sven Jari Stehn forecasted a cut in October, citing that “incoming data point to a faster slowing of wage and inflation pressures than foreseen in the September staff projections”.

He expects further adjustments in December and subsequent meetings, with the ECB potentially reaching a terminal rate of 2% by June 2025.

Economists at UBS forecast that the ECB will lower rates in its meetings in October, December, January, and March. Similarly, Citigroup predicts that cuts will continue through early 2025, with the deposit rate falling to 1.5% by September 2025.

Nevertheless, not all analysts agree on the imminence of a rate cut. ING Group has expressed doubt that the ECB will act in October, arguing that such a move would represent a shift in the bank’s response function, moving away from inflation control to boosting growth.