The European Central Bank (ECB) is expected to cut interest rates again this week as inflation across the eurozone continues to ease. With consumer price growth now below the ECB’s 2% target, policymakers are increasingly focused on stimulating growth in the slowing eurozone economy.
In September, inflation dropped to 1.8% for the first time since 2021, sparking optimism that inflation is under control. Although inflation may rise slightly towards the end of the year, ECB officials are confident in their progress. “Victory against inflation is in sight,” said Francois Villeroy de Galhau, the governor of the French central bank and a member of the ECB’s governing council.
The ECB has already cut rates twice in 2024, with reductions in both June and September, bringing the deposit rate down to 3.5%. The central bank is set to meet on Thursday in Slovenia to discuss another potential 25 basis point cut. This meeting comes amid growing signs that the eurozone’s restrictive monetary policies are stifling economic growth.
Recent data on weakening price pressures and economic activity have further fueled expectations for a rate cut. “Policy rates are too restrictive in the euro area,” noted Frederik Ducrozet, chief economist at Pictet Wealth Management.
ECB President Christine Lagarde has expressed increased confidence that inflation is on track to return to target levels. Speaking last month, Lagarde said the ECB’s efforts to control inflation were “progressing” and emphasized that the bank will consider the latest economic indicators in its upcoming decision.
However, the ECB faces the challenge of balancing inflation control with preventing a deeper economic downturn. The eurozone’s largest economy, Germany, is struggling, and officials expect it to contract by 0.2% in 2024, marking the second consecutive year of recession.
Some analysts believe the ECB could act preemptively to ease the impact on growth. “A cut would put the ECB ahead of the curve,” said ING analyst Carsten Brzeski, though he cautioned that such a move could be controversial given the ECB’s gradual approach to policy adjustments.
The ECB is closely watching global factors, including potential disruptions in oil prices due to geopolitical tensions in the Middle East, which could affect inflation and influence its decision. Regardless of the outcome on Thursday, markets will be keenly listening to Lagarde’s comments for indications of future rate cuts.
As HSBC analysts warned, “Inflation is down but not out,” and while a rate reduction is likely, the ECB is expected to remain cautious about committing to further cuts.
