From Morningstar: 2024-10-17 10:06:00

The European Central Bank slashed the key deposit facility rate by 0.25 percentage points to 3.25% due to disinflation progress and muted economic data. This marks the second consecutive cut since September, spurred by lower-than-expected eurozone inflation figures, hinting at a potential further decrease in December.

Inflation data showed a drop to 1.7% in September from 2.2% in August, with core inflation slightly down at 2.7%. The ECB sees disinflation on track, expecting inflation to hit its 2% goal sooner than anticipated. Economists predict rates could fall to 2.5% in the next year amid market speculation of a December cut.

Market strategist Michael Field deems the risk of economy overheating low with further rate cuts, but the direction towards lower rates seems clear. The ECB has now completed three rate cuts from its peak of 4%, with additional decreases forecasted. Interest rates for refinancing, marginal lending, and deposit facilities saw reductions of 0.25 percentage points each as of October 23.

European stocks remained steady post-ECB rate cut, but the euro weakened against the dollar. A December rate cut is highly awaited, as indicated by economist polls and money market projections. ECB’s acceleration in rate cuts aims to curb downside risks to growth, necessitated by sub-trend euro growth and at-target inflation, with market uncertainty on future rate cuts.

The ECB’s quicker pace of rate cuts aligns with faltering economic growth, exacerbated by global factors like China’s policy support and potential trade conflicts post-US elections. ECB projections for inflation and growth remain steady, but December’s forecast update is awaited. Core inflation figures are expected to decline swiftly, with a minor economic growth revision downwards.

The future trajectory of eurozone interest rates remains uncertain, with markets foreseeing rate cuts until at least April 2025. Analysts predict a decline in the deposit facility rate to 2% by summer 2025, contingent on global economic developments. Despite market expectations, the path of ECB monetary policy post-2025 remains unclear.



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