Today, the European Central Bank (ECB) announced its third rate cut of the year, bringing the deposit rate to 3.25%. This decision was in line with expectations and was made unanimously. The ECB President, Lagarde, acknowledged the weakness in economic data since the last meeting and expressed confidence that the inflation path is on track, leading to the rate cut.
During the press conference, Lagarde mentioned that the disinflationary process is “well on track” and that recent downside surprises in economic indicators have impacted the inflation outlook. The final inflation release also confirmed low inflation momentum, particularly in services. Lagarde expressed surprise at the acceleration in inflation, which stood at 1.7% y/y in September.
The ECB is facing downside risks with weakening indicators since the last meeting, prompting discussions on intensifying policy easing efforts. The labor market remains resilient, but employment has plateaued, and domestic inflation is high at nearly 4%. The ECB is monitoring rising costs and profit margins, as well as the resumption of household purchasing power, which could potentially fuel future inflation.
Despite the restrictive financing conditions, the ECB’s policy stance may need to adjust given the weak economic activity and disinflationary trends. There is uncertainty about how long the ECB will maintain its restrictive stance, with some speculating a potential cut below the neutral policy rate of 2% by the end of next year.
Looking ahead, the ECB will analyze a substantial data package before the December meeting to assess the risk of undershooting the inflation target. Market expectations suggest a possible shift towards a neutral yield outlook, with potential implications for the euro and bond markets.
In conclusion, the ECB’s rate cut reflects concerns about economic indicators and inflation momentum. The decision to cut rates unanimously highlights the need for cautious monitoring of future developments and potential policy adjustments. As the ECB navigates through uncertain economic conditions, stakeholders will closely watch for further guidance on the central bank’s future actions.
