ECB Faces Growing Concerns Over Economic and Inflation Slowdown... Another Cut Expected in October

Expected Freeze, but Weight Leans Toward Cut

Eurozone economic growth is slowing down and inflation is easing, raising concerns. As a result, expectations are mounting that the European Central Bank (ECB) will cut interest rates in October.

On the 13th (local time), major foreign media reported that the ECB is expected to implement a rate cut on the 17th. Initially, the market believed a rate cut would be difficult until December, but due to the unexpected slowdown in the Eurozone economy, there is now a consensus that a rate cut at the October monetary policy meeting is inevitable.

[Image source=Reuters Yonhap News]

In September, the Eurozone consumer price inflation rate fell to 1.8%, dropping below the ECB’s target of 2% for the first time in three years and five months. This was a significant decline compared to the previous month’s 2.2%. The Eurozone manufacturing PMI for September was 44.8, down from 45.8 in the previous month, indicating a contraction phase and falling short of market expectations.

The market expects the ECB to lower interest rates to around 1.7% by the end of next year. Jens Eisenschmidt, Morgan Stanley’s Chief European Economist, stated, "Avoiding a retreat to a pre-COVID-19 world with inflation below 2% will be one of the ECB’s biggest challenges." He also predicted that the ECB’s deposit facility rate (DFR) will reach 1.75% by December 2025, adding, "It is very likely that this level will not mark the end of the easing cycle."

Previously, during last month’s rate cut, few in the market predicted that the ECB would cut rates again in October, as the October meeting is held just five weeks after the September meeting. Last month, the ECB lowered the deposit rate by 0.25 percentage points from 3.75% to 3.50%, and cut the main refinancing rate and marginal lending rate by 0.6 percentage points each. In June, all three policy rates were cut by 0.25% each.

However, ECB President Christine Lagarde recently expressed growing confidence that the ECB’s medium-term inflation target will be achieved. This statement supports expectations for a rate cut. Additionally, Fran?ois Villeroy de Galhau, Governor of the Bank of France, and Martins Kazaks, Governor of the Bank of Latvia, recently made remarks backing the possibility of a rate cut in October. According to the ECB’s September meeting minutes, officials stated that the risk of inflation falling below the target "can no longer be ignored."

Bloomberg reported that economists surveyed expect the ECB to accelerate monetary easing to lower borrowing costs to a level that does not pressure the economy until the end of 2025. In an early October Reuters survey, 70 out of 75 economists forecasted a 0.25 percentage point rate cut by the ECB in October. This contrasts sharply with September, when only 9 out of 77 economists predicted a rate cut.

Sebastian Dullien, head of the Macroeconomic Policy Institute in D?sseldorf, pointed out, "The ECB is once again acting too slowly in adjusting rates," adding, "Excessively restrictive monetary policy has worsened structural problems."