ECB to be ‘cornered’ into back-to-back interest rate cuts as eurozone economy falters

The European Central Bank is expected to pull the trigger on another interest rate cut on Thursday as the eurozone economy continues to show weakness.

Markets are forecasting a 25 basis point cut in the ECB’s key deposit rate to 3.25 percent, following a cut of identical magnitude last month and marking its third reduction this year.

This is due to a continued deterioration in economic output, particularly in the crucial markets of Germany and France, weaker business and consumer confidence, and a decline in inflation.

Eurostat data shows inflation across the bloc fell to 1.8 percent in September, plunging below the ECB’s 2 percent target for the first time since June 2021, as core inflation cooled to a low. two years of 2.7 percent.

St James’s Place head of economic research Hetal Mehta said: “The ECB has apparently been cornered into a back-to-back rate cut after weak confidence data and a faster-than-expected fall in inflation.”

However, Mehta added that the ECB is unlikely to “pre-commit” to any path of monetary easing given the uncertainty of the global economic outlook.

Financial markets are currently pricing in a further ECB interest rate cut this year with several scheduled for 2025, with forecasts suggesting the rate will stabilize at 2 percent or lower.

Similarly, markets think the Bank of England could cut the base rate twice more this year after consumer price inflation slowed to 1.7 percent in September. However, the market believes the Bank of England’s terminal rate is likely to be closer to 3.5 percent.

ING senior rates strategist Benjamin Schroeder warned that pessimism about the eurozone’s growth prospects “may have gone too far”, meaning interest rates will not fall as much as markets are currently pricing in.

He said: ‘Yesterday’s ZEW index (an indicator of economic sentiment) saw somewhat greater improvement in the expectations component than expected and also the ECB’s bank lending survey has shown cautious improvements.

“At some point, the prospect of faster policy easing should help stabilize the longer-term outlook and limit the decline in forward rates.”

Raphael Olszyna-Marzys, international economist at J. Safra Sarasin Sustainable Asset Management, added: ‘If wages and core inflation rise unexpectedly in the coming months, the ECB could simply stop lowering rates further and keep them steady for longer.

‘Instead, it could be a political mistake not to lower rates quickly enough. If inflation were to fall faster than nominal rates, real rates would rise and unnecessarily weigh on economic activity.