Investors Await ECB Rate Cut in October on Easing Inflation

Expectations that rate reductions will accelerate after October might weaken the euro and the yields on government bonds. For the final two ECB meetings in 2024, the Eurozone money markets are pricing in 51 basis points of rate reductions. On October 17, investors are placing more and more bets that the European Central Bank will lower interest rates by another 25 basis points. This is because there is mounting evidence that both inflation and economic activity have decreased significantly.

Beyond October, several analysts also expect a faster pace of rate reductions than the once-per-quarter pace they had predicted previously, which is likely to cause Eurozone government bond yields and the euro to fall.

Eurozone inflation slowed below the European Central Bank’s 2% target for the first time since 2021 — backing investor bets that interest rates may be lowered more quickly than previously anticipated.

Consumer prices climbed 1.8% from a year earlier in September, down from 2.2% in the previous month as energy costs decreased considerably, Eurostat said Tuesday. The figure and core inflation, which decreased to 2.7%, were in line with a Bloomberg survey of analysts.

The data is expected to support investors’ growing opinion that the ECB has to ease monetary policy more quickly in order to accommodate a faltering economy and an unanticipatedly quick disinflation.

President Christine Lagarde gave legislators in the European Union a hint on Monday, saying that officials would consider the increasing optimism surrounding consumer prices when making their next decision on October 17.

The euro traded 0.4% lower at about $1.109, retreating from a near two-year high. Money markets now see an almost 90% chance that this month’s meeting will bring a third reduction of the year in rates.

Another quarter-point move is likely to follow when policymakers convene in December for the final time in 2024. That would bring the deposit rate down to 3% from 3.5% currently.

Economists have adjusted their rate calls as well, with Goldman Sachs and JPMorgan among the slew of Wall Street banks to now predict a step this month.

Economists expect the ECB to start a series of back-to-back cuts by 25 basis points in October. Upon reaching 2.5% in March we expect it will slow down and revert to a more gradual cutting schedule with a cut at every projection meeting.

Since the beginning of 2024’s summer, dovish opinion has dominated, according to Bloomberg Economics’ ECBspeak Index. After unexpected business surveys released by S&P Global last week revealed that the Eurozone economy shrank in September due to a decline in demand and a relaxation of pricing pressures, more rapid monetary easing was taken into consideration. National statistics from Germany, France, and Spain supporting that notion indicated that inflation was moderating below 2%.

However, fluctuating energy prices are dragging down the headline statistics, which will likely rise once more by year’s end. Furthermore, certain gauges are obstinately high. Only the services inflation rate, which officials have been using to gauge the intensity of domestic pricing pressures, decreased to 4% in September from 4.1% in August.

A significant factor in service prices, wage growth has been persistent but is beginning to slow. Some economists anticipate that trend to continue after workers’ salaries made up for the loss in purchasing power witnessed in recent years.

“We have reasons to believe that services are also beginning to abate, slowly and gradually, so we are heading in that direction of reduced inflation,” Lagarde stated in her hearing, acknowledging these trends.

The underlying cost pressure appears to be lessening. Inflation will gradually increase in the upcoming months due to base effects, but overall deflation is expected. In 2025, our projections indicate a consistent undershoot of the aim. Meanwhile, worries about the economy are growing, primarily because of the bleak future that Germany’s industrial sector faces. The Berlin government has revised down its estimate of this year’s economic growth, predicting at most stagnation after 2023’s full year recession.

Customers are feeling less positive as a result, even though they are benefiting from decreased inflation and growing salaries. They are nevertheless reluctant to part with their cash.

Economists cannot yet declare that a so-called soft landing is ensured due to obstacles to economic growth. Without endangering price stability, this should be considered in future monetary policy decisions.