ECB set to be ‘cornered’ into back-to-back rate of interest cuts

The European Central Bank is expected to pull the trigger on another interest rate cut on Thursday as the eurozone economy continues to show weakness.

Markets are forecasting a 25 basis point cut in the ECB’s key deposit rate to 3.25 per cent, following a cut of identical size last month and marking its third reduction this year.

It follows a continued to deterioration in economic output, particularly in the crucial markets of Germany and France, weaker business and consumer confidence, and easing inflation.

Reductions: Markets are pricing in two more ECB interest rate cuts this year, taking it to 3%

Eurostat data shows inflation across the bloc fell to 1.8 per cent in September, sinking below the ECB’s target of 2 per cent for the first time since June 2021, as core inflation cooled to a two-year low of 2.7 per cent.

Head of economic research at St. James’s Place Hetal Mehta said: ‘The ECB has seemingly been cornered into a back-to-back rate cut after weak sentiment data and a more rapid than expected decline in inflation.’

However, Mehta added the ECB is unlikely to ‘pre-commit’ to any path for monetary easing given the uncertainty of the global economic outlook.

Falling: The ECB cut its key deposit rate to 3.5% last month

Financial markets are currently pricing one additional ECB interest rate cut this year and several lined up for 2025, with forecasts suggesting the rate will settle at 2 per cent or below.

Similarly, markets think the Bank of England could cut base rate two more times this year after consumer price inflation eased to 1.7 per cent in September. However, market’s think the BoE’s terminal rate is likely to be closer to 3.5 per cent.

Senior rates strategist at ING Benjamin Schroeder cautioned that pessimism on the eurozone growth outlook ‘might have gone too far’, meaning that interest rates do not fall as much as markets are currently pricing.

He said: ‘Yesterday’s ZEW index [an indicator of economic sentiment] saw a somewhat bigger improvement in the expectations component than anticipated and also the ECB’s bank lending survey has shown cautious improvements.

‘At some point, the prospect of faster policy easing should help stabilise the longer outlook and should limit the downside in the forward rates.’

Raphael Olszyna-Marzys, international economist at J. Safra Sarasin Sustainable Asset Management, added: ‘Should wages and underlying inflation pick up unexpectedly in the coming months, the ECB could simply stop lowering rates further and keep them constant for longer.

‘Instead, it could be a policy mistake not to lower rates fast enough. If inflation were to fall faster than nominal rates, real rates would increase and weigh unnecessarily on economic activity.’