(Bloomberg) -- The European Central Bank is set to lower interest rates for a second straight meeting — quickening the speed of cutting after data showed that the rapid retreat in inflation is being accompanied by a deteriorating economy.
Just five weeks after the last reduction, analysts polled by Bloomberg unanimously predict that the deposit rate will be decreased by another quarter-point on Thursday, to 3.25%.
While inflation is now below 2% for the first time since 2021, it’s more the bleaker outlook for the euro-zone economy that’s hastening what was thought to be a quarterly rhythm for trimming borrowing costs. Risk factors, meanwhile, abound — from the Federal Reserve’s own easing campaign to the outcome of the US election and the hostilities in the Middle East.
“The ECB’s focus has shifted from too-high inflation to too-weak growth,” said Paul Hollingsworth, chief economist for Europe at BNP Paribas. “From a risk-management perspective, it makes perfect sense to accelerate the pace of easing, even if high uncertainty still calls for some caution.”
The ECB’s announcement is due at 2:15 p.m. President Christine Lagarde will hold a press conference 30 minutes later in Brdo, Slovenia, where officials have gathered for the one policy meeting of the year that they hold outside of their Frankfurt headquarters.
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Interest Rates
ECB policymakers signaled in September that a third rate cut of this cycle would probably only arrive at the final meeting of 2024, in December, when updated forecasts for economic expansion and inflation — including the first for 2027 — will be at hand.
But with recent data like S&P Global’s monthly poll of purchasing managers pointing to a decline in private-sector output, and Germany braced for a second straight annual drop in output, investors and economists began to bet on a step already this month — plus others to follow in quick succession.
“The PMI data certainly tilted the scales in favor of an October rate cut,” said Michala Marcussen, group chief economist at Societe Generale.
Many officials directly or indirectly endorsed such expectations. Lagarde said greater confidence in a timely return of inflation to target will be taken into account this month. France’s Francois Villeroy de Galhau described an October move as “very probable.”
Some hawks appear less comfortable with expectations of aggressive easing into 2025. In a Bloomberg interview, Latvia’s Martins Kazaks warned markets “against running ahead of themselves.”
Growth and Inflation
The ECB trimmed its economic projections for the next three years slightly in September — predicting 0.8% growth for 2024. But even that looks optimistic now.
A particular worry is that a slower recovery may at some point jolt the so-far-resilient jobs market, further dampening activity. For Portugal’s Mario Centeno, the danger is a return to the low-inflation, low-growth environment that preceded the pandemic.
Despite references to the risk of undershooting the target in the account of September’s meeting, some hawks still worry more about excessive underlying price pressures — particularly sticky services inflation — saying it’s too early to declare victory.
But a faster-than-expected return to 2% could open the door for more forceful cuts. Greece’s Yannis Stournaras said last week that the target may be hit mid-next year or earlier, whereas ECB projections only foresee that toward end-2025.
Geopolitical Risks
Complicating matters further are global developments whose knock-on effects are tricky to gauge.
Bundesbank President Joachim Nagel warned that Europe’s economy could face significantly lower growth and higher inflation should Donald Trump be re-elected as US president.
Some analysts, though, say Trump’s plans for drastic tariff increases, expansionary fiscal policy and severe immigration restrictions could also end up being disinflationary.
At the same time, a major escalation between Israel and Iran could engulf the broader region in conflict, triggering a jump in oil prices. Policymakers must also weigh how Chinese stimulus could shift economic outcomes in Europe.
“Growth, inflation and monetary policy could follow multiple paths in 2025,” analysts at Deutsche Bank said in a recent note.
Communication
As such, Lagarde is likely to remain tight-lipped on the pace and extent of further action — emphasizing the ECB’s “data-dependent” and “meeting-by-meeting” approach, without correcting market expectations for another rate cut in December.
Most economists also see officials reiterating that the Governing Council will keep policy “sufficiently restrictive” for as long as needed to ensure inflation reaches — and stays at — 2% in the medium term.
Some officials, though, are already mulling the prospect of bringing rates to a neutral level that neither stimulates nor restricts growth, should the inflation goal be reached.
While the neutral rate can only be estimated, it’s thought to be somewhere between 1.5% and 3%. A discussion around the “appropriate neutral policy rate configuration” is expected to intensify next year, said Konstantin Veit, a portfolio manager at Pimco.
--With assistance from Joel Rinneby and Harumi Ichikura.
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