Global: ECB Expected to Cut Interest Rates Again as Inflation Slows

As inflation eases and economic conditions worsen, the European Central Bank (ECB) is set to lower interest rates again on Thursday, but it remains cautious about revealing future actions. After aggressively raising rates since mid-2022 to combat soaring consumer prices, the ECB has started to dial back its efforts as inflation subsides.

Following a June rate cut, which reduced the key deposit rate to 3.75% from a peak of 4%, the central bank is expected to announce another quarter-point reduction this week, providing additional relief to businesses and households. This move would mark only the second rate cut since 2019 for the ECB, which oversees monetary policy for the 20 nations using the euro.

“Virtually all recent ECB speakers have confirmed that they would like to lower rates,” noted Berenberg bank economist Holger Schmieding. The ECB’s growing confidence in reducing rates is supported by signs that inflation is on a more sustainable downward path. In August, eurozone inflation fell to 2.2%, its lowest level in over three years, down from 2.6% in July, inching closer to the ECB’s 2% target.

The sharp inflation surge that began in late 2022, fueled by Russia’s invasion of Ukraine and pandemic-related supply chain disruptions, peaked at 10.6% in October. With prices now stabilizing, the ECB is focused on supporting growth amid a weakening economic outlook.

Economic Slowdown Fuels Pressure for Rate Cuts

The eurozone’s economic performance has been underwhelming in recent months, prompting further calls for rate cuts. Germany, the bloc’s largest economy, unexpectedly contracted in the second quarter, heightening concerns that the anticipated recovery might not materialize this year.

At the same time, wage growth—a key concern for the ECB—slowed significantly in the second quarter, easing fears that rising labor costs could reignite inflationary pressures. ECB policymakers will also consider updated inflation and growth projections to inform their decisions.

The ECB’s planned cut follows similar steps by the U.S. Federal Reserve, which is expected to lower rates at its upcoming meeting due to recent weak economic data and market turmoil, potentially giving ECB officials more confidence in their approach.

Cautious Outlook for Future Decisions

Despite the likelihood of a rate cut, ECB President Christine Lagarde’s post-meeting press conference will be closely watched for any hints about the bank’s future actions. However, analysts believe the ECB will be tight-lipped about its next steps, maintaining its stance of basing decisions solely on incoming data.

Policymakers have reason to proceed cautiously, as inflationary pressures remain in certain areas. Core inflation, which excludes volatile food and energy prices, stayed elevated at 2.8% in August, while inflation in the services sector increased. This mixed picture suggests that decisions beyond September may be more complex.

Economist Carsten Brzeski of ING Bank warns that future rate cuts could become “more complicated and controversial than currently priced in by financial markets.” He added that no new forward guidance is expected from the ECB at this meeting, as the central bank navigates the delicate balance between taming inflation and supporting economic growth.