The European Central Bank (ECB) has officially addressed speculation about an October rate cut. ECB President Christine Lagarde, speaking at a European Parliament hearing, noted increased optimism among eurozone policymakers about controlling inflation. She indicated that this sentiment would be reflected in the next monetary policy meeting.
Lagarde highlighted that eurozone inflation might temporarily rise in Q4 due to the exclusion of earlier energy price drops from annual data. However, she expressed confidence that inflation would return to target levels timely, suggesting that this would be considered in the October policy meeting.
In September, ECB staff forecasted overall inflation at 2.5% for this year, dropping to 2.2% in 2025 and 1.9% by 2026. Following Lagarde's comments, the probability of a 25-basis-point rate cut by the ECB in October increased to 85% in bond markets.
Recent economic data from various eurozone countries, including weaker-than-expected inflation figures from Spain, France, Italy, and Germany, have fueled discussions about a potential rate cut. The latest data suggests that the eurozone's September inflation rate might fall below the 2% target for the first time since mid-2021.
Several major financial institutions, including Goldman Sachs and JPMorgan, have revised their forecasts, now expecting a 25-basis-point rate cut in October. Nevertheless, future meetings remain uncertain, influenced by factors such as the upcoming U.S. election results.
Lagarde acknowledged economic headwinds but conveyed optimism about long-term growth, forecasting a eurozone economic growth of 0.8% in 2024, increasing to 1.3% in 2025 and 1.5% in 2026. The unemployment rate is expected to remain low.
The ECB executed the second key deposit rate cut of the current cycle in early September. However, deteriorating growth prospects suggest that the previous stance of waiting for comprehensive economic data before further action is now considered outdated.
