ECB to cut rates by 25bp, any sign of worry about growth outlook could see faster rate cuts

Markets are more-or-less fully pricing in a 25 basis point cut this week, which means that the decision itself is unlikely to have any real impact on the common currency.

Attention will be on the signalling within the bank’s communications.

Of particular interest will be the tone of the bank’s remarks on the state of the Euro Area economy and outlook for growth, as recent activity data, particularly the PMIs, are now pointing to stagnation or worse.

Any signs of increased concerns over the growth outlook among officials on Thursday could indicate that the ECB is ready to cut rates at a faster pace than markets are currently pricing in.

As things stand, a third consecutive 25 basis point cut seems highly likely when the bank convenes for its following meeting in December, but there is less of a consensus as to the pace of cuts in 2025.

We don’t think that Lagarde will offer any real forward guidance, but a more dovish tone on growth and greater confidence on inflation may change our view for quarterly rate reductions next year.