The European Central Bank (ECB) meets this Thursday to cut interest rates for the third time this year after the declines in June and September. At least that is the general opinion of the market and analysts. The decision, which would increase the deposit facility rate from 3.5% to 3.25%was not in the plans of the organization’s top officials, who left their September meeting confident they could call a pause in October and resume budget cuts at their December conclave. What has happened since then? It can be said that a vehicle traveling at high speed drove over the ECB and then fled. This car is none other than that of the American Federal Reserve.
The US central bank’s surprise decision in September to begin its rate-cutting cycle with a major “giant” reduction (50 basis points, double the usual amount) put all the pressure on the ECB’s shoulders. : if the “American friend”, with its hitherto resilient economy, lowered rates which have sharply, in Anemic Europe had to put more meat on the grill and don’t wait until December for another drop.
Coming data (especially a heartbreaking PMI for September and inflation already below 2% among major Eurozone currencies thanks to the oil crash) provided the final impetus. That’s when several members of the European supervisor, based in Frankfurt, Germany, including its own president, Christine Lagarde, agreed to open the door to a movement in October, arguing that weak growth is starting to spark criticism. serious concerns. . Even a traditional hawk like German Bundesbank President Joachim Nagel said he was “open” to a cut in October, which would appear to be the final nail in the coffin for those who still oppose the measure.
The result was that forecasts for this month’s ECB Governing Council meeting saw intense oscillations in recent weeks, derived from growth and inflation data already known through movements and ECB statements. Federal Reserve.
The diabolical thing about this situation is that the ECB had virtually no room to back down in October, just as US macroeconomic data was warming up again and The Fed is already announcing that it will proceed more slowly with budget cuts. Simply put, the Fed played a prank on the ECB: it urged it to run towards the abyss and jump together…and Just as they reach the cliff, the Fed stops and sees how the ECB throws itself into the void.
Even so, some experts believe that the ECB was destined to cut rates again even before the Fed encouraged it to jump off the “cliff”. IG underlines in a note that the main catalyst for this expected rate cut is the recent drop in inflation below the ECB’s 2% target: “The preliminary inflation rate for September was 1.8 %, the lowest level in more than three years. This fact strengthened the case for monetary easing.
Pimco strategist Konstantin Veit defends Thursday’s rate cut from a risk management perspective: “With a still restrictive level of 3.25%, any upward impact on inflation can be offset by a faster reduction in rates in the future. , while lower rates provide additional protection against downside risks“.
What will happen after October
The big question after this leap into the abyss is what will happen to interest rates in the eurozone in the future. If this decoupling between the Fed and the ECB continues, the euro will continue to depreciate, which could become a problem for inflation. However, even if the October cut was not expected, nor was the depreciation of the euro, the ECB must now maintain a relatively telegraphed road map.
“It seems clear that by the end of the year we will see two cuts in the intervention rate, one in October and the second in December, both of 25 basis points and which would place the ease of filing at the end of 2024 at the lowest level 3% Given that there will be no update of the macroeconomic forecasts at the October meeting. You will have to pay attention to the speech after the meeting and above all the tone used by Lagarde during the press conference, which will give us indications of what we can expect in the face of the next meetings, thinking in particular of 2025″, they say from Ibercaja.
“Although the market is talking about at least three cuts of 25 basis points for the first half of next year, we think it is risky to make predictions today. The ECB will defend in its speech the action based on published data “We will know and decisions will be taken meeting by meeting, so the focus will continue to be on the evolution of growth and price data in Europe”, say the bank’s experts. Spanish.
“The ECB will likely insist that decisions will continue to be taken on a meeting-by-meeting basis, and the flow of data in the coming months will determine the speed at which the ECB continues to remove additional restrictive measures. inflation (excluding impact of imports) remains too high, largely reflecting persistent price pressures in the services sector, we expect monetary policy to remain in restrictive territory for now and the debate over the appropriate setting of tariff neutrality interest rate will be accentuated next year,” says Pimco’s Veit.
The analyst concludes that the stock market valuation seems reasonable to him and sees “a further drop in rates probable in December, and the fixing of a terminal rate around 2% for the second half of next year “remains consistent with our estimates of a neutral interest rate for the euro area.”
Reasons not to cut back so “fortunately”
After the probable reduction of this week, Ángel Talavera, of Oxford Economics, introduces that “the fight between the hawks and the doves will move towards the debate around the December meetingwhile inflation is expected to pick up again, due to unfavorable base effects. “”Hawks will likely continue to cling to signs that wage growth is too high and services inflation is too high to argue against in the years to come. the Spanish analyst.
In the same vein, some analysts are not satisfied with a more generous rate cut trajectory. Jörg Krämer of Commerzbank gives up to four reasons not to cut rates on Thursday and not to accelerate the cuts. First, he points out in a note to his clients, underlying inflation has fallen in part because Falling energy prices have had a domino effect on consumer prices through, for example, transport services, reducing them indirectly. “This is what we saw last autumn. However, this effect faded shortly after the start of the year,” explains the German.
Secondly, he states, the increase in agreed wages in the eurozone It has since accelerated and stabilized at the high level of 4.5%, which is not compatible with the 2% inflation target set by the ECB. Third, he continues, many eurozone companies continue to suffer from a labor shortage. “And if the ECB lowers interest rates in this situation, it will boost business investment demand and worsen the labor shortage in the market in the medium term,” he warns.
Fourth and finally, Krämer advises caution after periods of high inflation. “Businesses and citizens will remember the shock inflationary for a long time; Long-term inflation expectations are no longer so firmly anchored at 2% like the years before the coronavirus. The ECB should therefore maintain a restrictive monetary policy for longer than usual. Otherwise, the fight against inflation risks failing again, as happened after the oil shocks of the 1970s,” he believes.
