Just three weeks ago, European Central Bank (ECB) officials believed that a rate cut at the October 17 policy meeting was unlikely. However, the situation has changed dramatically, making a 25 basis point cut almost certain.
Commercial survey results have significantly worsened, inflation data has dropped below 2% for the first time in over three years, and the Federal Reserve's shift to a more accommodating stance has provided additional assurance. These factors have pushed ECB policymakers to the brink of formally approving the cut. Investor expectations for a rate cut this month are so strong that the market-implied probability has reached 90%. Previously, economists who predicted a December rate cut have revised their forecasts, with institutions like Morgan Stanley and Barclays changing their outlook earlier this week.
According to Martins Kazaks, Governor of the Bank of Latvia, the ECB will discuss and decide on the rate cut at the next meeting, considering more data is expected before then. He pointed out that the risks to the economy have become more evident, and there is a growing balance between persistent internal, especially service inflation, and weak economic growth.
This shift is particularly noteworthy given that the ECB policymakers previously sought extensive evidence to justify their two rate cuts since June. They also preferred to align with the quarterly release of economic forecasts. During the September meeting, the ECB relied on two sets of inflation data and a GDP report. This time, the Governing Council seems willing to act based on a single consumer price report, a series of confidence indices, and fragmented wage evidence.
Even before data showed that the inflation rate in the eurozone was only 1.8% last month—significantly below the 2% target—ECB President Christine Lagarde indicated on Monday that the momentum for further easing measures was building. She expressed confidence that the latest developments reinforced the belief that inflation would return to target levels in due time and hinted that this would be considered at the next monetary policy meeting.
