ECB delivers back-to-back rate cuts

Summary

• In a widely expected decision, the European Central Bank (ECB) cut is policy rate 25 bps to 3.25% at today's announcement. The accompanying statement was balanced in tone. The ECB repeated that domestic inflation is high, wage growth elevated, and that it will “keep policy rates sufficiently restrictive for as long as necessary”. On the more dovish side, the ECB said the disinflationary process is well on track, and that recent downside surprises in economic activity affect the outlook for inflation.

• Considering nominal and real policy interest rates that are still elevated by historical standards, we believe subdued economic conditions support our outlook for steady 25 bps ECB rate cuts at the December, January and March announcements.

• At this stage, we see limited potential for the ECB to step up to a 50 bps pace of rate cuts. However, if Eurozone data were to remain especially benign, we see some potential in a risk scenario for the ECB's “every meeting” approach to rate reductions to extend a little longer, with rate cuts possible at each meeting through June next year.

European Central Bank delivers back-to-back rate cuts

The European Central Bank (ECB) lowered its Deposit Rate by 25 bps to 3.25% at today's monetary policy announcement. The decision was widely expected, coming in the wake of a recent weakening in sentiment surveys that hinted at a slower pace of expansion and a lessening of price pressures, as well as the September CPI which confirmed ongoing gradual disinflation.

In lowering interest rates, the ECB repeated some familiar refrains. Leaning to the more hawkish side, the ECB said:

• It will keep policy interest rates sufficiently restrictive for as long as necessary, and described current financing conditions as restrictive.

• Domestic inflation remains high and wages are still rising at an elevated pace, but labor cost pressures are set to continue easing gradually, with profits partially buffering their impact on their inflation.

• It is not committing to a particular rate path.

On a more encouraging note, the ECB also said:

• The incoming information on inflation shows that the disinflationary process is well on track. The inflation outlook is also affected by recent downside surprises in indicators of economic activity.

• Inflation would decline to target in the course of the next year, in contrast to its previous assessment that it would return to target in the second half of 2025.

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