The latest noticeable decline in inflation indicators and deterioration in leading economic indicators will likely prompt the European Central Bank to make another interest rate cut in October. This was already hinted at by Lagarde yesterday, during her speech in front of the European Commission. Not long ago, the market expected that the institution would take a “pause” in the first month of the fourth quarter. The OIS contracts market currently indicates that the implied probability of such a decision is already about 90 percent. In mid-September it was only 25 percent. Let us remind you that in the ongoing cycle of monetary easing, the bank has so far decided on two cuts, one in June and another in September. The last cut was larger than the standard 25 basis points and was 60 basis points, which had already been communicated in March. This deeper cut was only a technical adjustment. The institution aims to maintain a smaller difference in relation to the deposit rate. Narrowing the “corridor” to 15 basis points is intended to better manage market rates as a whole.
At 11:00 today, we will learn preliminary data on the dynamics of prices in the euro zone for September. The last drop in inflation is very noticeable. Forecasts indicate that the HICP index has been reduced to 1.9 percent. year-on-year, and the core has stabilized at 2.8 percent. Data that has already arrived from other European countries have surprisingly lower results, which confirms the general deflationary trend. For Spain, price growth dynamics fell from 2.4 percent. to 1.7 percent and in France there was a drop from 2.2 percent. to 1.5 percent There was also a drop in Germany to the 1.8 percent ceiling. This is largely a result of lower energy prices. Such significant drops are still missing in core inflation, whose return to target will take a little longer.
Looking at the economic situation, it is not very promising. The PMI Composite for the Eurozone fell from 51 pts below the border zone and in September was 48.9 pts. The index for the industry has been in the regression zone for a long time and despite the reaction at the turn of 2023 and 2024, it has entered a downward trajectory again. Services were able to react more, but recently the situation has significantly deteriorated.
Political “doves” in the ECB, who make up the majority in the Board of Directors, will likely use the collapse in leading indicators and the surprise drop in inflation to push through another interest rate cut in October. Over the past weeks, they have already expressed their concerns about the weakening economy and the possibility of inflation falling below the 2 percent target. Yesterday, Christine Lagarde emphasized in her speech to the European Parliament that the recent drop in inflation will be considered at the October meeting, which can serve as an indirect indication of what the market can expect. In addition, she mentioned that price growth dynamics in the coming months will likely be lower than the current ECB projections indicate. The chance of a “cut” in November and December has increased significantly.
However, the pace of further rate cuts may slow down in 2025. If the ECB approaches its neutral level of interest rates (according to the bank, this is between 2 and 2.5 percent), then voices against further easing may appear on the board. Core inflation will still be stubborn next year (especially in services) and a decrease towards the target will take a longer time. This process can be slowed down by the still high wage growth. It cannot be excluded that key decisions will only be taken at meetings where new forecasts will be developed.
Following yesterday’s statements from the ECB, the euro lost value. The decline in the EUR/USD pair was amplified by Powell’s evening statements. The rate has decisively moved away from the 1.1200 resistance.
Łukasz Zembik, Oanda
Source: https://ceo.com.pl/lagarde-zwieksza-szanse-na-pazdziernikowa-obnizke-stop-proc-przez-ebc-20566
