The ECB is set to reduce interest rates for the third time this year on Thursday, as inflation risks are dropping faster than expected.
Inflation in the euro area fell to 1.8% in September, under the ECB’s 2% target, with core inflation at a two-and-a-half year low of 2.7%.
These numbers have continued to decline after recent rate cuts, taking the key rate from 4% to 3.5%.
Markets expect an additional 25 basis point cut in October and a further cut to 3% in December.
The sentiment for quick cuts has surged since the ECB’s last meeting, with signals from officials indicating a likelihood of cuts, including statements from France’s central bank governor.
Weak Growth
Expectations for these cuts are also influenced by slow economic activity in the euro area, paralleling the U.S. Federal Reserve’s recent rate reduction.
Recent data indicates stagnation in economic activity, following weak growth numbers.
The ECB has lowered its growth forecast for the euro zone to 0.8% from 0.9%.
Language Adjustment
Economists expect the ECB to cut rates but maintain their current guidance. Some predict rates could drop to 2% by June 2025.
However, there are concerns about easing too quickly, as inflation may not remain in check beyond 2025.
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