The ECB will again cut rates by 0.25% in October and confirm its readiness to go “meeting by meeting”.

The European Central Bank (ECB) will hold a new monetary policy meeting tomorrow, at which it is expected to cut interest rates by 0.25%, which will go from 3.5% to 2.25% in response to the already weakening economic growth in the eurozone . lower inflation than expected. The monetary authority is continuing its roadmap of cuts that international managers say could last until the first quarter of 2025, but beware: it is too early to hear confirmation from Christine Lagarde that they have won the battle against inflation.

“We believe the ECB will announce a 25 basis point rate cut this week due to sluggish economic activity and a more encouraging inflation path. While the ECB will want to maintain flexibility on the future path of interest rates, we expect further cuts of 25 basis points to be announced in December and January, bringing the deposit rate to a landing zone of around 2% at the end of June 2025. “, he states. Eric Mueller, Director of Marketing and Product Strategy at Muzinich & Co.

But yesas he admits Tomasz Veladek, chief European economist at T. Rowe PriceA couple of weeks ago, neither markets nor politicians expected such a result. “What has changed since then is the weakening of major business surveys, especially the September PMIs; IPCA service inflation in September; and the tight labor market.

A vision that also shares Konstantin Veit, portfolio manager at PIMCO: “Although the ECB had previously targeted its next rate cut in December, weaker macroeconomic forecasts have likely bolstered the Governing Council’s (GC) confidence enough to deviate from a quarterly rate cut and take its first measure. outside of staff meetings.”

According to Stephen Bell, Chief EMEA Economist at Columbia Threadneedle Investments“The ECB all but promised rate cuts at its meeting next week, eurozone inflation fell below its 2% target for the first time in more than 3 years, Italy and France presented very tight budgets, and “economic data showed persistent economic sluggishness.” »

Felix Feser, economist from Abrodna, He takes his analysis a step further and believes it is likely that the ECB will implement a new rate cut of 0.25% in December, January and March. “There remain both downside and upside risks. Uncertainty resulting from geopolitical conflict in the Middle East has driven up oil prices, indicating increased exogenous risks to the inflation outlook. Meanwhile, Any relatively small deterioration in the bloc’s growth rate could push it into recession, which could lead the ECB to cut rates even more aggressively.“, he clarifies.

Market vision

Are these forecasts exaggerated? To PIMCO’s manager, the market valuation seems reasonable. “A further rate cut in December appears likely, and the terminal rate target of around 2% for the second half of next year remains in line with our estimates of a neutral interest rate for the eurozone,” he said.

From Bank of America They note that they do not agree with the market pricing for the ECB’s tapering cycle. As the company explains in its latest analysis, tFollowing the post-NFP sell-off, the ESTR curve is at a low of just under 2.0%, meaning the deposit rate will never reach 2.0%. “This in itself makes the tariffs cheap.What’s also striking, however, is how little the market differentiates between the expected Fed and ECB rate cut cycles, even though the two economies couldn’t be more different today than they are.. “We remain fundamentally optimistic about European rates, believing that the ECB’s rate cut cycle assessment offers a fundamental value proposition for investors,” they explain.

For my part, Ronald Temple, chief market strategist at Lazardbelieves it is unlikely that the body chaired by Christine Lagarde will disappoint markets given persistent deflation and discouraging economic data, as already reflected in the September 12 meeting reports published last week, and now believes a rate cut is highly possible. below 2% in this easing cycle.

“With eurozone growth likely to remain below potential for much of 2025 and inflation approaching its 2% target, I expect the ECB to move into expansionary monetary policy territory while the Fed tries to remain neutral rate or slightly higher to avoid a resurgence of inflation in a significantly stronger economic environment in the United States,” he comments.

What will be the roadmap?

Investment firms have no doubt about the cuts, but believe the ECB will insist that decisions will continue to be made meeting by meeting, and the flow of data in the coming months will determine the speed at which the ECB continues to lift additional restrictive measures. .

According to Ulrike Kastens, European Economist at DWSlittle will change in terms of monetary policy. “Given the current political and economic uncertainty, many members of the ECB Council believe that it is now premature to declare victory over inflation. Therefore, the data-driven, meeting-by-meeting approach is likely to continue. We expect further rate cuts in the coming months. The next step is likely to occur in December 2024, when forecasts up to and including 2027 will also be available, which will be particularly important for assessing whether the inflation target is on track,” says Kastens.

In this sense, Viladek argues that The data means the ECB will likely continue to signal cuts that will be decided on a case-by-case basis.. “This is not only because the ECB wants to maintain choice in future policy, but also because the case for successive rate cuts is not as clear as in previous rounds of consecutive cuts,” he says.

According to the chief economist for Europe at T. Rowe Price, at the moment, great uncertainty in terms of economic policy is affecting the confidence of producers in the eurozone. “The US presidential election, with the risk of subsequent tariff wars, clearly poses the biggest risk to European companies’ investment intentions going forward. On the other hand, current attempts to stimulate the economy in China could lead to an unexpected recovery in economic activity in the eurozone. At this point in the business cycle, tariffs will cause significant harm to the economy. The application of tariffs on EU exports to the US could lead to a significant weakening of activity in the eurozone, and the ECB will reduce the tariff by 50 basis points at its March 2025 meeting. But China’s stimulus could also help Europe’s manufacturing sector recover from current levels. This could lead to the ECB introducing gradual rate cuts again. The outcome of the ECB’s monetary policy currently depends on the evolution of China and the United States.– Viladek argues.

Debate

According to Carsten Junius, Chief Economist, J. Safra Sarasin Sustainable AMThere has been some debate recently about why the ECB was so late in recognizing that the balance of risks between inflation and growth had changed. “This may be due to Lagarde’s consensus-oriented leadership style. This style was highly appreciated by us and others, as it was crucial to the reunification of the Governing Council after Draghi’s hierarchical approach to decision-making, which had disappointed many of its members,” he notes.

However, he claims that This style shows that reaching consensus takes time.Thus, the central bank appears to respond to turning points in the economy later than other central banks. “His slow exit from quantitative easing and delayed response to the 2022 global inflation crisis, as well as his overly restrictive stance on fighting inflation, clearly show the shortcomings of this consensus guidance. As a result, The ECB is not as much of a thought leader in the global central banking community as its size and resources might suggest.. Instead, it appears to be following other central banks that have shown a willingness to accelerate rate cuts toward more neutral policies. Making decisions more slowly than others may have the advantage that you will make fewer mistakes. But at the same time, it usually implies that more drastic measures need to be taken later. This makes ECB policy more unstable than necessary. In fact, we observe that its key policies are more unstable than, for example, Switzerland,” concludes Junius.