The European Central Bank (ECB) is expected to cut interest rates for the second consecutive meeting, responding swiftly to a troubling combination of falling inflation and a rapidly deteriorating economic outlook across the eurozone. Just five weeks after its last rate reduction, market analysts, including those at SARACEN MARKETS, anticipate the ECB will announce a 25 basis point cut on Thursday, lowering the deposit rate to 3.25%.
This move comes as the eurozone grapples with sluggish growth, exacerbated by weak private-sector activity and a deeper-than-expected economic slowdown in Germany. The ECB’s decision, set to be unveiled today, will be followed by a press conference from President Christine Lagarde in Brdo, Slovenia. The policy gathering, held outside the ECB’s Frankfurt headquarters, is expected to shed light on the central bank’s strategy for managing the eurozone’s fragile economic recovery.
In September, ECB policymakers indicated that a third rate cut would likely be deferred until the final meeting of 2024, scheduled for December, when fresh economic forecasts including the first projections for 2027 would be available. At the time, the central bank seemed intent on maintaining a cautious approach, signaling that further easing would be data-dependent and aimed at ensuring inflation returns sustainably to its 2% target.
However, recent data has shifted the balance of expectations. S&P Global’s purchasing managers’ index (PMI) showed a notable contraction in private-sector output, a worrying sign that economic activity is weakening faster than anticipated. The PMI report has heightened concerns about the health of the eurozone’s largest economy, with Germany bracing for its second consecutive annual drop in output. This downturn, alongside stagnating growth in other core economies, has fueled speculation that the ECB will act sooner than initially signaled, with investors now pricing in an October rate cut.
The prospect of further reductions in quick succession is also gaining traction. Financial markets are betting that the ECB’s actions this month could pave the way for additional rate cuts before the year’s end, as policymakers confront the growing risk of prolonged economic stagnation. With inflation falling more rapidly than expected, the central bank is under pressure to accelerate its easing cycle to support the eurozone’s flagging economy.
Lagarde’s upcoming press conference will likely offer more clarity on the ECB’s outlook, particularly regarding its assessment of inflation dynamics and the broader economic trajectory. While the central bank has successfully managed to bring down inflation, the challenge of reigniting growth looms large, especially as rising geopolitical risks and global uncertainty weigh on the economic outlook.
As the ECB prepares for what could be a pivotal policy shift, market participants are closely watching for signals on how aggressively the central bank intends to proceed with its rate-cutting agenda. The economic data now in hand suggests that the eurozone may be in for a tougher road ahead, with further monetary easing necessary to stabilize growth and prevent deeper economic malaise.