The European Central Bank (ECB) policymakers convened on Thursday, with weakening price pressures and sluggish economic activity in the eurozone prompting them to consider another rate cut. Following a record-breaking cycle of interest rate hikes, the ECB began easing rates this year.
The 26 members of the ECB's Governing Council are gathering in Slovenia, part of their regular meetings away from the ECB's headquarters in Frankfurt. ECB President Christine Lagarde arrived ahead of her colleagues and, in a video posted on social media on Tuesday, mentioned that she was "checking prices" at a market in Ljubljana, the capital of Slovenia.
What she likely heard from the vendors would have been reassuring—recent data indicates that inflation in the eurozone has significantly slowed down. In Slovenia, the year-on-year growth rate of consumer prices in September was a mere 0.6%. For the entire eurozone, this figure stands at 1.8%—marking the first time in three years that it has fallen below the ECB's 2% target.
After already implementing two rate cuts this year, including at the previous meeting in September, policymakers initially expressed a preference to wait until December for another rate cut. However, the underwhelming data from September has further reinforced the sentiment that consumer prices, which soared following the COVID-19 pandemic and Russia's invasion of Ukraine, are now back under control."Victory over inflation is in sight," said François Villeroy de Galhau, Governor of the Banque de France and a rate-setter for the European Central Bank (ECB), last week.
"A rate cut is very likely," he said, referring to the meeting on Thursday, adding that "this will not be the last one."
"Significant"
The ECB has reduced its key deposit rate from a peak of 4% by 25 basis points on two occasions, once in June and another in September.
Deutsche Bank analysts said there is "little clear opposition" among ECB policymakers to another rate cut of the same magnitude on Thursday, calling the move potentially "significant."
Investors are looking for clues on future interest rate movements from ECB President Christine Lagarde.
They said, "As the first consecutive rate cuts in this cycle, this will mark the entry into a faster easing cycle."
Berenberg Bank analyst Holger Schmieding said that trends in inflation and the real economy both support the rationale for a "direct" rate cut.
Schmieding said that wage increases to compensate for soaring food and energy prices "seem to be gradually fading," and the ECB will ignore the small inflation rebound expected at the end of this year.
Meanwhile, the eurozone appears to be weak. The ECB's forecasts released last month already anticipated a slowdown in economic growth to a modest 0.2% in the third quarter.A series of negative sentiment indicators in the following weeks confirmed the impression that action was needed to bring relief to households and businesses.
More rate cuts?
Looking ahead, Schmiedin said that even if the European Central Bank (ECB) accelerates the pace of rate cuts, it will continue to emphasize that its actions are "data-dependent."
This frequently repeated phrase is likely to appear in the statement that Lagarde plans to make at 2:45 PM (12:45 PM Greenwich Mean Time) in Slovenia after the ECB makes its decision.
Analysts will scrutinize her remarks for any clues about the thoughts of ECB policymakers and the future direction of interest rates.
Schmiedin said that, at a minimum, Lagarde will not "correct the market's expectation that the ECB will cut rates by 25 basis points at its December meeting."
The fourth rate cut since the ECB began lowering borrowing costs would bring the key deposit rate down to 3%, but observers say the bank is unlikely to stop there.
HSBC analyst Chris Hare said: "The ECB will cut rates at every one of the next five policy meetings, including Thursday's meeting."
Hare said that a series of 25 basis point rate cuts through April would bring the deposit rate down to 2.25%, a level that would shift from neutral to "slightly accommodative" for the economy.
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