ECB Cuts Interest Rates Ahead of US Fed, What Is the Future Interest Rate Path?

Additional Rate Cut Weighed by ECB
"December Over October"

With the US Federal Reserve (Fed) rate cut this month all but certain, the market is focusing on the future rate cut path of the European Central Bank (ECB), which lowered rates ahead. ECB officials are leaning towards additional cuts but are watching December rather than making further cuts as soon as next month.

According to Bloomberg on the 15th (local time), Pierre Wunsch, Governor of the National Bank of Belgium and an ECB official, said in an interview with Belgium's VRT, "If our forecasts in the baseline scenario become reality, we could lower rates further."

[Image source=Reuters Yonhap News]

Governor Wunsch added, "However, if service inflation remains high, the rate cuts may happen more slowly," noting that "Europe's recovery is progressing slowly."

On the 12th, the ECB cut its key interest rate by 0.60 percentage points from 4.25% to 3.65% and the deposit rate by 0.25 percentage points from 3.75% to 3.50%. The ECB maintained its consumer price inflation forecast at 2.5% for this year and 2.2% for next year. It expects consumer inflation to rebound during the remainder of this year and approach the target rate (2%) in the second half of next year.

ECB President Christine Lagarde hinted that the next rate change would be in December. According to Bloomberg, at the Eurozone finance ministers' meeting held on the 13th in Budapest, Hungary, she said that while she is willing to consider a rate cut in October if the economy experiences a severe recession, the likelihood of a cut in December is higher. At the rate decision the day before, she stated, "The path of rate cuts is quite clear, but the speed and destination are not predetermined."

Bloomberg explained, "Lagarde's remarks provide the clearest signal that officials are leaning towards waiting until December for the next move, but they have said they will rely on data and have not ruled out action next month."

On the same day, other ECB officials supported additional cuts but showed a cautious stance regarding the future rate path. Fran?ois Villeroy de Galhau, Governor of the Banque de France, said, "Rates should be lowered gradually," adding, "I do not commit to a specific rate path and will keep all options open until the next meeting."

Martins Kazaks, Governor of the Bank of Latvia, said, "Looking at financial markets, the likelihood of a rate cut in October is low," but added, "If the economy suffers an unexpected shock causing it to weaken significantly more than currently expected and inflation decreases, a rate cut could be considered."

Robert Holzmann, Governor of the Oesterreichische Nationalbank and known as a hawk within the ECB, told major foreign media, "There may be room for another 0.25 percentage point cut in December." He also said that October might not be an appropriate time to lower rates.