FRANKFURT (AFP) – The European Central Bank (ECB) is expected to lower interest rates again this week as anxiety about inflation in the eurozone fades and concerns over sluggish growth mount.
Inflation fell to 1.8 per cent across the 20 members of the euro area in September, the first time it has been below the ECB’s target of two per cent since 2021.
While the rate is expected to tick up again towards the end of the year, the sense that consumer prices are back under control has grown.
“Victory against inflation is in sight,” French central bank governor Francois Villeroy de Galhau, who sits on the ECB’s rate-setting governing council, said last week.
“A cut is very likely,” he told Franceinfo radio, adding that “it will not be the last”.
ECB policymakers will meet in Slovenia on Thursday to decide whether to reduce rates further and up the tempo of cuts. The central bank is headquartered in Frankfurt but sometimes holds monetary policy meetings in other parts of the eurozone.
The bank has already cut rates twice from their peak of four per cent, once in June and again at its last meeting in September.
The ECB lowered the interest on its deposit facility by 25 basis points in each case, leaving the benchmark rate at 3.5 per cent.
But new data showing weaker price pressures and economic activity confirmed the impression that “policy rates are too restrictive in the euro area”, said chief economist at Pictet Wealth Management Frederik Ducrozet.
In response to soaring inflation, the ECB had raised rates further and faster than ever before.
The moves to raise borrowing costs and slow the pace of consumer price rises had their effect. The ECB’s efforts to tame inflation were “progressing”, the bank’s president Christine Lagarde said last month.
Recent economic indicators “strengthen our confidence that inflation will return to target in a timely manner”, Lagarde told the European Parliament.
The ECB would take the fresh figures “into account in our next monetary policy meeting”, she said.
In the name of “data dependence”, the ECB has tended to move with the rhythm of its forecasts, which are updated at every other meeting, with the next batch due in December. Rate-setters could be tempted to act “preemptively” to avoid suffocating growth too much, Ducrozet said, predicting another cut of 25 basis points on Thursday.
Last month’s ECB forecasts already showed eurozone growth slowing to 0.2 per cent in the third quarter, and weak morale among businesses had further clouded the outlook. The bloc’s biggest economy Germany has also struggled to get going, with Berlin last week saying it now expects the economy to shrink by 0.2 per cent in 2024 – a second straight year in recession.
“Risks are now clearly tilted to the downside”, when it comes to economic growth, said ING analyst Carsten Brzeski.
However, the possibility that the ECB would hold rates steady in October “cannot be excluded entirely”, Brzeski said.
