Euro Area: ECB decreases rates in October
Second consecutive cut meets market expectations: At its meeting on 17 October, the European Central Bank (ECB) decided to lower the deposit rate by 25 basis points to 3.25%. It also reduced the refinancing rate and the lending rate by 25 basis points to 3.40% and 3.65%, respectively. The decision marked the second successive cut and aligned with market expectations.
Bright inflation outlook and soft activity prompt cut: The ECB asserted that the disinflationary process was well on track: Inflation fell to 1.7% in the Euro area in September—below the ECB’s 2.0% target—and is expected to settle around the target over the course of 2025 after temporarily rising at the tail end of 2024. Meanwhile, the Bank highlighted that high-frequency data points to weaker-than-expected GDP growth and that it continues to see risks to activity tilted to the downside, giving further reason to cut rates.
December cut on the cards, with further easing expected in 2025: The ECB reiterated that it will keep policy rates sufficiently restrictive for as long as necessary to ensure inflation returns to its 2.0% medium-term target, emphasizing a data-dependent and meeting-by-meeting approach. At the accompanying press conference, Governor Lagarde left the door open for a rate cut at the last meeting of the year on 12 December, stating that “If the data continues to point in the same direction, we will act accordingly, but we remain flexible and open”. Our panel is roughly split between those who expect a 25 basis point cut in December and those who expect a hold. Our Consensus is for the Bank to deliver a cumulative 100 basis points of additional cuts by end-2025.
Panelist insight: Carlos Castellano and María Martínez, economists at BBVA Research, commented:
“Overall, the ECB struck a dovish tone on both economic activity and inflation, effectively laying the groundwork to justify a rate cut they had almost pre-announced in the weeks leading up to the meeting. While they continue to emphasize a data-dependent approach, all signs point toward another 25bp rate cut in December.”
Nomura analysts stated:
“We maintain our view that the ECB will cut rates at each meeting until mid-2025, with a final 25bp cut in September 2025, bringing the depo rate to below neutral in order to support the economy.”