The ECB cut interest rates for the second time in the new round of monetary policy easing that began in June, with the deposit rate, which is also its main instrument, falling to 3.5% from 3.75%, as was more widely expected.
With Lagarde giving no indication of the next meeting on October 17, the possibility of another rate cut next month is unlikely. That’s what the markets think too, seeing a 20% chance of a new move then from the 40% they saw before the ECB meeting.
However, the markets consider it almost certain that the third reduction in interest rates by 25 basis points will take place in December, while in general analysts express the opinion that the Board of Directors of the central bank will proceed every quarter to reduce interest rates, after having received the revised forecasts of ECB experts on inflation, growth and in general the course of the Eurozone economy.
These forecasts are made every March, June, September and December, integrating a multitude of data during the interim periods and thus giving greater security to the 26 members of its Board of Directors for the correctness of their decisions.
However, if there is a significant change in forecasts between two consecutive meetings – in the direction of a significant drop in inflation or growth – this could lead to interest rate cuts in consecutive meetings. This is what some analysts say is likely to happen in 2025 if, as they estimate, the European economy continues to oscillate between wear and tear.
The ECB meets a total of eight times in a year, with the figures announced in two consecutive meetings being relatively few. For example, until the next meeting in October there will be the September inflation data and the economic activity index for the same month based on the surveys among responsible purchasing managers (PMI).
Notably, ECB experts forecast a decline in headline inflation in September from the 2.2% level that had fallen in August, but an increase thereafter by the end of the year as energy prices will not match the high levels they had by early fall 2023. Therefore, there would have to be some significant reduction in inflation and/or a significant drop in economic activity for another October rate cut to occur.
An additional reason that explains why the ECB is not in a hurry to reduce interest rates is the course of structural inflation and mainly domestic inflation. The level of the latter is twice that of general inflation and the reduction in August to 4.4% from 4.5% in July is insufficient, as Christine Lagarde said.
With the September forecasts, on the other hand, there is a slight upward revision of core inflation by 0.1 percentage points for 2024 and 2025 compared to the June forecasts, while headline inflation forecasts remained unchanged and in line with them it will move to 2% before the end of 2025.
There is a slight, but downward, revision to the GDP forecast, which is now expected to grow by 0.8% this year and 1.3% in 2025 compared to 0.9% and 1.4%, respectively, in the June forecast.
The reduction in interest rates will affect all loans that Greeks have with a floating interest rate and a one-month or three-month Euribor clause, as the latter are below 3.5%. The exception is mortgages that were not “red” and were concluded by the end of 2022, as for them the Euribor rate has been frozen by the banks from 2023 below 3% and therefore further reductions will have to be made from ECB, so that they see their dose reduced.
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#Interest #rates #Tough #cut #ECB #October #Markets #expect #December
