Several European Central Bank (ECB) policymakers made their case for another interest rate cut even though the Middle East’s unrest continues to drive energy prices’ volatility.
In October, the European Central Bank reduced its deposit rate to 3.5%, following two rate reductions so far.
Financial markets have nearly fully priced in 17, suggesting that given the weak economy and the unexpectedly rapid slowdown in price growth, investors expect the bank to accelerate the pace of policy easing.
“A cut is very likely and it will not be the last one, the rhythm depending on how the fight against inflation evolves,” French central bank chief Francois Villeroy de Galhau told Franceinfo Radio Station.
That message is entirely expected given that over 90% of Reuters-surveyed economists predict a cut, with a comparable majority betting on an additional move in December this year.
“Even if we have one cut of 25 basis points now and another one in December, we will be back to just 3% — still in highly restrictive territory,” Greek central bank chief Yannis Stournaras told the Financial Times in his support for back-to-back moves.
Olli Rehn of Finland, Martins Kazaks of Latvia, and Mario Centeno of Portugal have all argued for a cut in October 2024, and market bets have been strengthened by ECB chief Christine Lagarde’s strong hint about the move.
The problem is that inflation has decreased more quickly than the ECB had anticipated, the labour market is softening, wage growth is slowing, and the economy has been stagnating for the majority of 2023.
However, Pierre Wunsch of Belgium remained unsure, claiming that conflicting factors were at work because while growth is slow, domestic inflation is still too high, and energy prices have increased due to geopolitical tensions.
“Is there a decisive factor that means we have to open the discussion in October? I’d really like to see the central bank staff’s analysis,” Wunsch told Belgian newspaper l’Echo.
The European Central Bank’s deposit rate is now expected to drop to 3 per cent by the end of the year and 2% by the end of 2025, reaching what many in the financial community refer to as the neutral rate, a level that neither accelerates nor decelerates economic growth.