ECB Cuts Rates; Growth Forecasts Revised Lower

As widely expected, the European Central Bank (ECB) cut all three key benchmark rates at today’s meeting. The central bank lowered the deposit facility rate by 25 basis points to 3.50% from 3.75%; the main refinancing rate and marginal lending facility rates were also reduced by 60 basis points to 3.65% (from 4.25%) and 3.90% (from 4.50%), respectively.

This marks the second time this year that the ECB has reduced rates amid inflation subsiding. You will likely recall that the August CPI inflation (Consumer Price Index) report revealed that price pressures slowed to +2.2% (YoY), pencilling in its lowest level since mid-2021 and down from +2.6% in July. Core inflation, however, remains sticky. Although August’s (YoY) print came in at +2.8%, down from +2.9% (July) and marking its lowest rate in four months, the measure has averaged +2.9% since the beginning of the year. Services inflation also remains stubborn, fluctuating around +4.0% since late 2023.

Data-Dependent Approach

The accompanying rate statement was little changed in terms of language. The rate statement emphasised that the central bank remains ‘determined’ to bring inflation back to the 2.0% target in a ‘timely manner’. The statement also repeated that the Governing Council will continue to adopt a data-dependent and meeting-by-meeting approach and that the central bank remains non-committal to a ‘particular rate path’.

Nevertheless, the question for many investors heading into the rate announcement was not whether the central bank would ease policy today – this was a widely telegraphed move – the focus was more on whether the ECB would provide any hints as to the future rate path, which, unfortunately, was not the case. Despite this, money markets are currently pricing in nearly 40 basis points of easing by the year’s end. Investors forecast around a 70% probability that the central bank will hold things at current levels at October’s meeting and pull the trigger again in December.

Updated Quarterly Projections

Today’s meeting also saw the central bank update its quarterly projections, displaying a downward revision to growth and an upward revision to core inflation.

• Growth was revised lower across the board, expected to rise +0.8% this year (from +0.9%), +1.3% in 2025 (from +1.4%), and +1.5% in 2026 (from +1.6%).
• Regarding headline inflation, the ECB forecasts remained unchanged, averaging +2.5% this year, +2.2% in 2025, and +1.9% in 2026. The statement noted: ‘Inflation is expected to rise again in the latter part of this year, partly because previous sharp falls in energy prices will drop out of the annual rates’.
• In terms of core inflation, ECB projections showed an upward revision in 2024/25, with price pressures expected to rise +2.9% this year (from +2.8%), +2.3% in 2025 (from +2.2%) and +2.0% in 2026 (unchanged from prior projections).

ECB President Lagarde

Following the rate announcement, ECB President Christine Lagarde held a press conference consisting of a prepared statement and a Q&A session.

At today’s meeting, Lagarde said it was unanimously decided to cut the deposit facility rate by 25 basis points. This is unlike June’s meeting, where Robert Holzmann, Austria’s central bank chief, dissented. Lagarde added that given ‘the gradual disinflationary process, it was perfectly appropriate to moderate the degree of monetary policy restriction’.

Lagarde also noted that the euro area’s economic recovery ‘continues to face some headwinds’ and added: ‘We expect the recovery to strengthen over time as rising real incomes allow households to consume more. The gradually fading effect of restrictive monetary policy should support consumption and investment’.

Overall, investors got very little from the statement or the presser today. Markets were also largely muted. A short-lived pop higher in the euro was seen versus the US dollar, but it was ‘nothing to write home about’.

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