It will be the third official rate cut since June and the first time in 13 years that the ECB cut rates back-to-back, having last done so during the financial crisis.
Traders are banking on around a 90% chance of a 25 basis-point cut, which would bring its deposit rate down to 3.25%, a significant increase from as low as 20% when the ECB met last month.
The shift follows a surge in Eurozone business activity this month, which unexpectedly contracted in September, as investors feared that the ECB may not cut rates quickly enough.
Several policymakers have already made the case for an October cut with ECB chief Christine Lagarde even hinting at one, saying confidence in falling inflation would be reflected in the bank’s decision.
Markets are expecting another cut before Christmas with rates likely to level out at about 2.25 per cent by the end of 2025.
With a smaller-than-usual gap of just five weeks between decisions, and not much new data available, officials appear to be abandoning recent caution about lingering inflation pressures in order to respond mainly to survey data pointing to a contraction in the private-sector economy.
Eurozone inflation, which surged over 10% two years ago, dropped below the ECB’s 2% target in September. Even stubborn services inflation, a particular worry for the ECB, dropped slightly, while on a monthly, seasonally-adjusted basis, it slowed to its weakest since November 2023.
Derivatives used to hedge inflation risk suggest price growth will hold below 2% from the first quarter of next year, according to data compiled by Danske Bank, much faster than September’s ECB projections.
For now, growth remains one of the ECB’s key concerns and is banking on rising real incomes, boosting consumption and growth to 1.3% next year from 0.8% this year.
While more than 179,000 people on tracker mortgages will benefit immediately from the ECB’s likely decision, there will be no instant benefit to variable and fixed-rate mortgage holders.
However, the move will put further downward pressure on rates across the board, with heightened calls for the AIB, Bank of Ireland and PTSB to lower rates as the Christmas season approaches.
With growth on the ECB’s radar, geopolitical risks remain a key concern for policymakers. Oil prices have risen by over 9% since the start of October as conflict in the Middle-east escalates, but remain more than $10 below this year’s peak.
In addition, if former President Donald Trump were to win and follow through with a pledge to slap 10% tariffs across imports, that would hit eurozone growth and boost the case for deeper rate cuts, economists have said.
Additional reporting from Reuters.
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Publish date : 2024-10-16 05:35:00
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