ECB: Why the Next Interest Rate Cut is Expected in December

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Investors Anticipate Future ECB Meetings

After the conclusion of the September ECB meeting, investors are already looking ahead to upcoming gatherings.

The key question stirring the financial markets is when the third cut in interest rates will be executed.
ECB President Christine Lagarde hasn’t dispelled this uncertainty, emphasizing a data-dependent approach, with decisions made on a meeting-by-meeting basis.

Interestingly, a noteworthy signal emerged from Lagarde’s comments a day late.
Speaking at a meeting of eurozone finance chiefs in Budapest, she mentioned that the ECB might consider an interest rate cut in October if there were a significant downturn in the economy, despite the next full set of data being available only at the following meeting.
Thus, could December be the right month for another reduction in borrowing costs?

Potential Rate Cut in December?

Lagarde’s recent statements, delivered just a day after the second rate reduction of 25 basis points, are the clearest indication that policymakers are inclined to await December for the next move.

Analysts believe it would take a notable worsening of Eurozone growth prospects or aggressive easing from the Federal Reserve to stray from the quarterly rate cut strategy.
Following this rationale, December seems most suitable for further easing, especially with additional data to analyze, as Lagarde has highlighted.

ECB officials following the meeting exhibited cautiousness in signaling future steps.
French President Francois Villeroy de Galhau remarked that policymakers should continue to lower rates “gradually”, emphasizing a “highly pragmatic” approach.
“We are not committing to any particular rate trajectory in advance,” he stated.

Current Economic Climate and Inflation Considerations

Having eased monetary policy twice in June and September, the ECB is responding to the latest drop in inflation, bringing the price index closer to the 2% target.
While some remain wary of persistent price pressures in the services sector, others fear that the ailing Eurozone economy might result in inflation dipping below the target, reminiscent of conditions before the pandemic.
Thus, all options remain viable for both October and December.

Analysts’ Predictions for ECB’s Next Moves

Experts hold varying views regarding the ECB’s impending actions.
Bill Diviney, head of macroeconomic research at ABN Amro, notes that the ECB is keeping its options regarding an October rate cut open.

He emphasizes the importance of upcoming economic reports such as September inflation data and Eurozone PMI, which could impact the next rate decision.
Diviney anticipates “further cuts of 25 basis points in both October and December” if the data aligns accordingly.

Conversely, Carsten Brzeski from ING Group suggests that an October cut is unlikely, with December being more plausible.
He also mentions potential hesitancy from the ECB, hinting at the necessity for more aggressive cuts not occurring before 2025.

According to Roberto Coco, chief strategist at BBVA Madrid, Lagarde’s confidence in the ECB’s inflation forecasts, which predict achieving the 2% target by the end of 2025, supports the case for additional rate cuts, albeit without rapid or mechanical reductions at each meeting.
He foresees an “accommodative pause” in October, followed by another cut in December.

Lastly, Sven Jari Stehn, an economist at Goldman Sachs, argues that factors like “moderate growth, continued progress in core inflation, and cooling wage growth” are likely to lead to a third rate cut of 25 basis points in December.

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