The Eurozone's inflation rate has dropped below the target value, pushing the European Central Bank (ECB) to likely accelerate its rate cuts. On Wednesday, ECB Governing Council member and Latvian Central Bank Governor Martins Kazaks indicated that recent data clearly points to the direction of a rate cut.
Kazaks noted that economic risks, particularly in the domestic service sector, remain significant and are offset by trends leaning towards weak growth. He expects interest rates to be further reduced after October but urges caution due to geopolitical risks and the upcoming U.S. elections.
ECB Vice President Luis de Guindos also highlighted that short-term Eurozone economic growth may be weaker than expected but should accelerate later. He cited increased real income and dissipating restrictive monetary policy effects as factors that could support consumption and investment. Guindos emphasized that the recovery should be based on productivity growth, which has been particularly weak since the pandemic began.
Recent data showed Eurozone inflation in September falling below the 2% target for the first time since 2021. ECB President Christine Lagarde provided a clear signal on forthcoming rate cuts, expressing confidence that inflation will fall to the 2% target.
As economic growth slows and inflation decreases, the market anticipates the ECB will cut rates faster than expected. The ECB's next rate decision is set for October 16-17. In June, the ECB made its first 25 basis points rate cut, followed by another 25 basis points cut in September. Currently, the Eurozone's main refinancing rate, marginal lending rate, and deposit rate are 3.65%, 3.90%, and 3.50%, respectively.
The likelihood of a third rate cut at the next meeting is 90%. Major Wall Street firms have adjusted their expectations accordingly. Citigroup predicts a 25 basis points cut in October, with further cuts in December and early 2025, setting the policy rate at 1.5% by September 2025. Bank of America (BofA) also revised its forecast, now expecting the next rate cut in October instead of December. BofA anticipates consecutive cuts leading to a deposit rate of 2% by June 2025, with further cuts reducing it to 1.5% by September 2025, six months earlier than previously expected.
