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ECB delivers second rate cut of the year

The refinancing rate, meanwhile, was cut by a much bigger 60 basis points

The European Central Bank cut interest rates again on Thursday as inflation slows and economic growth falters, but provided almost no clues about its next step, even as investors bet on steady policy easing in the months ahead.

The ECB cut its deposit rate by 25 basis points (bps) to 3.50 per cent, as expected, following a similar cut in June, as inflation is now within striking distance of its 2 per cent target and the domestic economy skirts a recession.

The refinancing rate, meanwhile, was cut by a much bigger 60 basis points to 3.65 per cent in a long-flagged technical adjustment.

The euro briefly touched a session high after the rate decision and was last stood around $1.1028. Government bond yields in the euro area were little changed and European stocks held higher.

An index of euro area banks was up 1.8 per cent.

Money markets priced in roughly 40 bps of further easing by year end and a roughly 42 per cent chance of a quarter point move in October.

Hussain Mehdi, director investment strategy, HSBC Asset Management, UK, said: “A rate cut at this meeting wasn’t in doubt. Cooling economic data in the bloc – especially a big drop in wage growth – and a dramatic repricing of U.S. rate expectations over the summer has weakened the hawks’ influence in our view. For the time being, we think the global economic outlook of further disinflation and central bank easing is a decent environment for risk assets... But the outlook remains highly uncertain. The risk of a hard landing remains fairly high, as policy rates remain in restrictive territory. Market volatility is likely to be a key feature heading into 2025.”

Yael Selfin, chief economist, KMPG, UK, said: “Looking ahead, the path for interest rates remains uncertain. While there is widespread consensus on the Governing Council that policy restrictiveness should be eased, divergent views remain around the pace of cuts. We expect a further one in December this year, taking the deposit rate down to 3.25 per cent. If the outlook weakens further, it will strengthen the case of more dovish policymakers to increase the pace of cuts in 2025, towards a terminal rate of around 2.25 per cent.”

Lindsay James, Investment Strategist, Quilter Investors, London, said: “Today’s news is sure to provide some relief to consumers and businesses, which could help the continent on its way towards an improved economic recovery, but whether the ECB can cut rates again this year remains to be seen. The ECB has much less wiggle-room than other central banks, so although a further cut in October is not entirely off the cards, the ECB will as always remain heavily reliant on the data that comes out between now and then. Ensuring inflation continues to head in the right direction, and particularly making more of a dent in core inflation, will be top of its agenda.”

Neil Birrell, CIO, Premier Miton Investors, UK, said: “The rate cut from the ECB was well telegraphed. They will be looking ahead to the prospects for growth, rather than over their shoulder at inflation. It’s all about how steep the path to lower rates will be at the remaining meetings this year and through next year. Like most other regions, the euro zone economy could do with some stimulus, and this is a step along that path. Economic data over the next few weeks will determine the timing of the next policy move.”

Carsten Brzeski, global head of macro, ING, Frankfurt, said: “Looking ahead, we expect the ECB to eventually step up the pace of further rate cuts. Not this year, but next year. Why not this year? Because currently, German wage negotiations and increasing selling price expectations still point to some stickiness of inflation. And given that the ECB’s track record of predicting inflation on its way up is rather weak, the ECB will want to be entirely sure before engaging in more aggressive rate cuts.”

Sylvain Broyer, chief EMEA economist, S&P Global Ratings, London, said: “As expected, the ECB has implemented a 25-bp rate cut with no additional policy guidance. With wage growth far outpacing productivity and service inflation picking up again, the Governing Council has no reason to accelerate the pace of cutting rates or committing to further rate cuts at this stage. The upcoming 35-bp reduction in the repo rate is unlikely to have a significant impact. While it may serve as a ceiling for money market rates in the long term, banks currently have little incentive to tap the markets, as their liquidity needs are being fully met by the ECB.”

Marchel Alexandrovich, economist, Saltmarsh Economics, London, said: “As expected, the ECB cuts interest rates by 25 bps, and more or less, repeats its statement from June by ‘not pre-committing to a particular policy path. The new forecasts show a combination of slightly weaker GDP growth and slightly higher underlying inflation. Overall, we think the ECB is laying the groundwork for further easing in Q4.”