The European Central Bank (ECB) cut its benchmark rates by 25bp for a third time this year, taking the deposit facility rate to 3.25%. After the latest reduction, the main refinancing operations and marginal lending facility rate stand at 3.40% and 3.65% respectively. The ongoing and on-track disinflationary process was cited as the key raison d'etre behind the back-to-back rate cuts. Cost-push forces by way of labour costs were also expected to ease gradually, bringing inflation down on a durable basis. Euro area inflation fell further, below the 2% target to 1.7% in Sept vs 2.2% in Aug, dragged by a deeper decline in energy and easing services, which offset the modest sequential rise in food and non-energy industrial goods. While there was no explicit mention of the weak growth impulse, it was amply clear that consistent softness in incoming activity indicators was also behind the stepped-up policy support, with yesterday’s move coming only a little over a month after the mid-September cut.

The bloc’s PMIs slipped into contractionary territory, and survey-based indicators infuse little optimism. A boost in August industrial production whilst encouraging, might lack momentum as the core member countries which are more reliant on manufacturing activity face a concoction of concerns including increased competition, and sluggish demand for its key exports i.e., autos as well as capital goods, consequently lagging export recovery in the region besides subdued investment sentiments. We expect this weak demand momentum to be captured at the next ECB quarterly staff projections, with a downward revision in the growth forecasts. Implied rates signal that the ECB would embark on a relatively more aggressive easing cycle compared to the Fed.

We revise our rate cut path to include one more rate cut in 4Q24, followed by further reduction in first half of 2025 to take the neutral rate to 2.0%, compared to 2.5% assumed earlier. Separately, the ECB’s plans to discontinue reinvestments under the PEPP by end-2024 is on track.

Radhika Rao

Senior Economist – Eurozone, India, Indonesia

[email protected]