The European Central Bank (ECB) plans to cut interest rates for the third time this year, as inflation risks are decreasing faster than expected.
In the euro area, inflation dropped to 1.8% in September, below the ECB’s 2% target. Core inflation, excluding volatile items, is at a two-and-a-half-year low of 2.7%.
These figures have continued to decline even after the ECB reduced rates by 25 basis points in June and September, lowering the key rate from 4% to 3.5%.
Money markets expect another 25 basis point cut this October and a further decrease to 3% in December.
Expectations for faster cuts increased after the ECB’s September meeting and dovish comments from officials, including Bank of France Governor Francois Villeroy de Galhau, who called an October cut “very likely.”
ECB President Christine Lagarde noted increased confidence that inflation will return to target soon, indicating a shift in approach from her earlier cautious stance.
Weak Growth
Economic slowdown in the euro area and the Federal Reserve’s recent decision to cut rates have raised expectations for more cuts from the ECB.
Data suggest stagnation in activity in the third quarter, following modest growth earlier in the year, with upcoming reports expected.
Capital Economics predicts further ECB rate cuts, forecasting rates could drop to 2.5% due to a cooling labor market and slower wage growth.
Adjustment in Language
Economists expect the ECB to cut rates without significant changes to its guidance, marking the start of an accelerated path toward lower rates.
While Lagarde likely won’t adjust market expectations for a December cut, some analysts warn against overreacting too quickly.
Long-term inflation concerns may arise in 2026 and 2027, signaling possible need for future rate hikes if rates drop too much.
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