ECB Paves Way for Faster Rate Cut, Next Week Could See Lower Rates

The minutes from the European Central Bank's (ECB) September monetary policy meeting indicate that the ECB's concerns over growth prospects have intensified, while it has become more confident that inflation will return to the 2% target next year. Analysts have noted that, given the policy space the ECB has reserved for accelerating rate cuts, it cannot be ruled out that the ECB may lower interest rates again next week.

According to the ECB's September monetary policy meeting minutes released on the 10th, the ECB's Governing Council expects inflation data to fluctuate in the coming months, but the overall downward trend will not change. Wage growth will further slow down next year, with no signs of a wage-price spiral. Recent improvements in the stability and accuracy of forecasts have strengthened confidence that inflation will reach the target by the end of 2025.

The minutes stated that looking ahead, if new data shows that inflation is falling at a faster pace or the economic recovery is significantly slowing down (which has implications for medium-term inflation), it may be necessary to accelerate the pace of interest rate adjustments. Conversely, it may be necessary to slow down the pace of interest rate adjustments.

In fact, judging from the official comments of the ECB over the past two weeks, many members of the ECB are in favor of lowering interest rates again at the monetary policy meeting to be held next week.

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The Governor of the Bank of Finland, Rehn, clearly stated last week that there are "more reasons" to implement a third rate cut on October 17th, following those in June and September.

Previously, ECB President Lagarde said at a hearing at the European Parliament in Brussels: "The latest developments have strengthened our confidence that inflation will return to the target level in a timely manner." "We will take this into account at our next monetary policy meeting in October."

Isabel Schnabel, one of the six Executive Board members of the ECB who has always been skeptical about rapid and significant rate cuts, also recently publicly stated that the likelihood of inflation continuing to decline to the 2% target is increasing. "We cannot ignore the headwinds to growth."

Another supporter of cautious rate cuts, the President of the Bundesbank, Nagel, said on Tuesday that the current interest rate policy has achieved the expected effect of curbing inflation, and inflation in the eurozone is clearly approaching the target. He is willing to consider taking further rate cuts.

Nagel also pointed out that there are signs that Germany's economic growth in the second half of the year is weaker than expected in early summer, and it is very likely to experience a slight recession as predicted by the Federal Ministry of Economics.

The Federal Ministry of Economics released a forecast on Wednesday, stating that Germany's Gross Domestic Product will shrink by 0.2% this year, instead of the previously expected growth of 0.3%.In 2023, Germany's GDP is projected to decline by 0.3%. If the federal government's forecast is confirmed, this will mark the second consecutive year of a slight economic recession in Germany.

The minutes from the European Central Bank's (ECB) September monetary policy meeting also indicate that policymakers are more concerned about the overall economic outlook for the eurozone, with a fragile expected recovery. The balance of risks to economic growth is skewed towards the downside, especially with increased short-term growth risks. It has been suggested that as inflation approaches its target, interest rate adjustments should pay more attention to real economic activity.

In September, the eurozone's consumer price index fell to 1.8%, the lowest level in over three years. Following the release of this data, many investment bank economists, including those from Deutsche Bank, Commerzbank, Société Générale, Morgan Stanley, Bank of America, and Goldman Sachs, adjusted their key interest rate forecasts for the ECB.

Economists from savings bank Dekabank and French foreign trade bank Natixis currently both anticipate a 0.25 percentage point interest rate cut by the ECB next week. Dekabank's Chief Economist, Ulrich Kater, stated that the possibility of the ECB cutting rates at every meeting (not just quarterly) in early 2025 has significantly increased. Natixis' expert, Shumacher, expects the ECB to continue with six consecutive rate cuts.

However, some experts believe that there is insufficient justification for an ECB rate cut in October. The significant decline in the September inflation rate aligns with the ECB's forecast and is primarily due to falling oil prices. The ECB emphasizes that the pace of rate reductions depends on data, but this does not equate to data point dependency; rather, it involves assessing the overall impact of the data on medium-term inflation prospects. For instance, the ECB may only react when oil price fluctuations could have significant spillover effects on the entire economy.

Carsten Brzesk, head of macro research at the Dutch International Banking Group, stated that if the ECB decides to cut rates next week, it would signify a significant change in its own reaction function. This would be a rate cut aimed at promoting growth. Subsequently, the ECB would continue with rate cuts to timely reduce the level of monetary tightening and prevent an unexpected economic downturn.

Since the ECB initiated rate cuts this year, it has only lowered interest rates in June and September, when new macroeconomic forecasts were released, with each cut being 25 basis points.