Why the ECB cuts interest rates yet again
On Monday, ECB President Lagarde surprisingly indicated that the ECB could cut its key interest rates again at its next meeting in just two weeks.
Commerzbank Economic Research
10/04/2024
Another interest rate cut in just two weeks
At the last ECB press conference three weeks ago, ECB President Lagarde indicated that another interest rate cut was unlikely at the next Governing Council meeting in October. The expected fall in the inflation rate in September was due to special factors, which is why inflation will rise again in the fourth quarter. During the press conference, the probability of an interest rate cut in October fell to around 25%.
In the meantime, the picture has changed markedly. Market participants now see a 90% probability of such an early rate cut. This was triggered by weak leading economic indicators and, in particular, inflation data from France and Spain at the end of last week, which were massively below the consensus expectations. Added to this was a speech by Lagarde to the European Parliament on Monday. She said that “disinflation has been accelerating over the last two months”. All of this will be taken into account at the October meeting. These are indications of an imminent rate cut that a central banker could hardly formulate more clearly. We therefore changed our forecast on Monday immediately after Lagarde's speech and now expect an additional rate cut of 25 basis points at the meeting intwo weeks. We expect a deposit rate of 2.5% for the middle of next year (previously: 2.75%).
Increased economic risks
The recent unexpectedly weak leading economic indicators point to an interest rate cut as early as October. This applies in particular to the composite purchasing managers' index for the eurozone. It fell sharply in September following a temporary rise in August. This important leading indicator for the eurozone's GDP is now back in a range in which the economy has often contracted in the past. The Ifo business climate also deteriorated significantly in September. After four consecutive declines, the trend of this equally important sentiment indicator is now clearly pointing downwards.
The increase in economic risks is likely to be related to the sharp rate hikes in 2022/23 that the central banks of Western countries were forced to make due to high inflation. Added to this is the continued weak growth in China as measured by the PMIs and China's shift towards greater economic autarky, which is why exports from the euro countries to China have fallen by around a fifth in the last five years. In some countries, such as Germany, the reform backlog and the loss of confidence in government economic policy also play a role.
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