The European Central Bank (ECB) is expected to cut interest rates for the third time this year due to easing inflation risks. Inflation in the euro area fell to 1.8% in September, below the ECB’s target of 2%, with core inflation at a low of 2.7%.
Following earlier cuts of 25 basis points in June and September, the ECB’s key rate now stands at 3.5%. Money markets predict another 25-basis-point cut this Thursday and a further cut to 3% in December.
Comments from ECB officials and recent inflation data from euro area countries, including Germany, have fueled expectations for these cuts. Bank of France Governor, François Villeroy de Galhau, noted that an October cut is “very likely” and that others may follow.
Weak Growth
Inflation and slow economic activity have driven the expectation for consecutive rate cuts. Recent data indicate stagnation in economic growth, particularly in the euro zone, following a 0.3% growth rate in the second quarter. A preliminary reading for Q3 will be available on October 30.
Analysts suggest that tight monetary policy is hindering growth alongside structural issues like reduced German industrial competitiveness. ECB’s Deputy Chief Economist forecasts multiple rate cuts until the deposit rate reaches 2.5% due to slowing wage growth and labor market conditions.
Adjustment in Language
Bank of America economists expect the ECB to announce a rate cut this week but anticipate no significant changes in guidance. They predict a gradual decrease in rates, anticipating a target of 2% by mid-2025.
Analysts also warn that the ECB risks overreacting with aggressive rate cuts, which could lead to an increase in rates again if inflation returns. Forecasts suggest inflation won’t be an issue next year, but may rise again by 2026 and 2027.
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