As concerns over inflation in the eurozone subside and worries about weak economic growth intensify, it is anticipated that the European Central Bank (ECB) will lower interest rates once again this week.

With the easing of inflation, the ECB has been reducing interest rates throughout the year. In September, the inflation rate in the eurozone's 20 member countries fell to 1.8%, marking the first time since 2021 that it has dropped below the ECB's 2% target.

Although inflation is expected to rise again by the end of the year, there is a growing sense that consumer prices are under control. "The victory over inflation is within sight," said François Villeroy de Galhau, Governor of the Banque de France and a member of the ECB's Governing Council, last week. "There is a high likelihood of a rate cut," he told a French news radio station, adding that "this will not be the last one."

Advertisement

ECB policymakers are set to meet in Slovenia on Thursday to decide whether to further reduce interest rates and accelerate the pace of rate cuts. The ECB is headquartered in Frankfurt but occasionally holds monetary policy meetings in other locations within the eurozone.

The ECB has already cut rates twice this year from a peak of 4%, once in June and again in September during the previous meeting. Each time, the ECB reduced the deposit facility rate by 25 basis points, keeping the benchmark rate at 3.5%.New data indicates a weakening of price pressures and a slowdown in economic activity, which confirms the impression that "the eurozone's policy interest rates are overly restrictive," says Frédéric Ducrozet, Chief Economist at Pictet Wealth Management.

"Making Progress"

In response to the surge in inflation triggered by the lifting of COVID-19 lockdowns and Russia's invasion of Ukraine, the European Central Bank (ECB) has raised interest rates by an unprecedented margin and at an unprecedented speed.

The move to increase borrowing costs and slow the rise in consumer prices has been effective. ECB President Christine Lagarde stated last month that the ECB's efforts to curb inflation are "making progress."

ECB President Christine Lagarde expressed greater confidence that consumer price pressures are easing.

Lagarde told the European Parliament that recent economic indicators "strengthen our confidence that inflation will return to target levels in a timely manner."

She said that the ECB will "take into account this new data" at the next monetary policy meeting.

Under the guise of being "data-dependent," the ECB tends to act in accordance with its forecasts, which are updated every other meeting, with the next batch of forecasts to be released in December.

Ducrozet suggests that policymakers may lean towards "preemptive" action to avoid over-restricting economic growth and predicts another rate cut of 25 basis points on Thursday.

The ECB's forecasts from last month already indicated that economic growth in the eurozone would slow to 0.2% in the third quarter, and low business morale further casts a shadow over the outlook.Germany, the largest economy in the Eurozone, is also striving to boost economic growth. Berlin announced last week that it currently expects the German economy to contract by 0.2% in 2024—falling into recession for the second consecutive year.

Downside risks -

ING Group analyst Carsten Brzeski stated that in terms of economic growth, "the risks are now clearly skewed to the downside."

However, Brzeski indicated that the possibility of the European Central Bank (ECB) keeping interest rates unchanged in October "cannot be entirely ruled out."

Brzeski said that a rate cut would put the ECB "ahead of the curve," lowering rates "in a timely manner before more economic surprises occur."

But he noted that reacting swiftly would still be "contentious" when officials emphasize the need for gradual action.

The ECB insists that it will only respond to new data when making interest rate decisions.

Brzeski said that the threat of escalating conflicts in the Middle East potentially causing oil prices to rise again is another factor that could make the ECB hesitant.

Regardless of the decision made, observers will closely monitor Lagarde's press statement for any clues about the ECB's next move.

"Inflation has declined but not disappeared," said HSBC analysts.They stated that even if the interest rates are lowered on Thursday, the European Central Bank will "not pre-commit to further rate cuts" and will "exercise caution regarding the future path of interest rates."