The European Central Bank (ECB) is expected to hold a monetary policy meeting on the 17th and decide on the key interest rate. The market anticipates that the ECB will proceed with a third interest rate cut following those in June and September. This expectation arises from rapidly cooling inflation and economic slowdowns in Germany and France, the largest economies in Europe. Analysts believe further interest rate cuts are inevitable to stimulate the economy. News outlets and market experts strongly believe in the likelihood of an additional rate decrease by the ECB.
Initially, the market doubted whether another rate cut would occur before December, given previous cuts of 0.25 percentage points in both June and September. However, with the Eurozone economy slowing more than expected, attention is now on the extent and pace of potential rate reductions.
The decline in the Eurozone’s Consumer Price Index (CPI), registering a 1.8% increase in September compared to the previous year, has fueled these expectations. This marks the first time in three years and five months that it’s below the ECB’s target of 2%, also showing a notable decrease from 2.2% in the prior month. The third quarter’s average CPI growth rate of 2.2% fell short of the ECB’s forecast of 2.3%.
Concerns about economic slowdowns continue to grow. The Eurozone’s manufacturing Purchasing Managers’ Index (PMI) was 44.8 in September, indicating contraction and falling short of market expectations. Additionally, Germany, the pillar of the Eurozone economy, significantly revised its GDP growth forecast for this year from 0.3% to -0.2%. France faces stagnant consumer spending despite high hopes for a boost from the upcoming Paris Olympics. Together, Germany and France account for 50% of the Eurozone’s total GDP.
Political risks also contribute to instability. Internally, there are concerns about fiscal deterioration due to the rising popularity of far-right populist policies amid economic slowdowns. Externally, potential direct trade conflicts with the United States and involvement in US-China trade disputes could arise if former President Donald Trump wins the upcoming presidential election.
In a speech last month, Christine Lagarde, ECB President, expressed confidence that inflation would timely reach the ECB’s target of 2% and indicated that these developments would be considered at the next monetary policy meeting in October. Some interpret this as suggesting further rate cuts. François Villeroy de Galhau, a member of the ECB’s Governing Council and Governor of the French Central Bank, supported this view by stating that a rate cut in October is very likely and hinted it might not be the last.
Meanwhile, Goldman Sachs predicted that starting with a 0.25 percentage point cut today, the ECB would continue reducing rates until June of next year, expecting rates to fall to the ECB’s target level of 2%.