ECB Announces 25 Basis Point Rate Cut

On the evening of October 17th Beijing time, the European Central Bank (ECB) announced that it would lower all three key interest rates by 25 basis points, bringing the main refinancing rate, the marginal lending rate, and the deposit facility rate down to 3.4%, 3.65%, and 3.25% respectively, in line with market expectations. This marks the third interest rate cut by the ECB this year.

Analysts suggest that the ECB's consecutive rate cuts are due to the Eurozone's "war on inflation" being won, yet the economy remains stagnant and is at risk of recession. Notably, the Eurozone's economic "engine"—Germany—is facing the risk of a second consecutive year of economic decline. The German Ministry of Economics stated that the German economy is expected to contract by 0.2% in 2024, a significant downgrade from the previously forecasted growth of 0.3%.

As a result, the market anticipates that the ECB will initiate a "rate-cutting storm." Both Goldman Sachs and Nomura predicted in their reports that after the October rate cut, the ECB will continue to lower rates by 25 basis points consecutively until the policy rate reaches 2% in June 2025.

Announcement of Rate Cut

On the evening of October 17th Beijing time, the ECB announced that starting from October 23, 2024, it would lower all three key interest rates by 25 basis points, setting the main refinancing rate, the marginal lending rate, and the deposit facility rate at 3.4%, 3.65%, and 3.25% respectively, in line with market expectations.

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Commentators say that the ECB's consecutive rate cuts signify a shift in focus from reducing inflation to protecting economic growth within the Eurozone. The Eurozone's economic growth has lagged significantly behind the United States for two consecutive years, and the risk of recession is increasing.

Following the announcement of the rate cut, traders maintained their bets on the ECB's rate cuts, expecting a 25 basis point reduction in December.

The Euro Stoxx 600 index rose after the ECB's interest rate decision, with a gain of over 0.90% as of press time; the euro against the US dollar fell in the short term, currently trading at 1.0834.

The ECB stated that the decision to cut rates was based on its latest assessment of inflation prospects, underlying inflation dynamics, and the strength of monetary policy transmission. The latest information on inflation indicates that the deflationary process is progressing smoothly. The inflation outlook has also been affected by the unexpected downward trend in recent economic activity indicators. At the same time, financing conditions remain constrained.

The ECB announced that it would reduce the emergency pandemic purchase program (PEPP) portfolio by an average of 7.5 billion euros per month. It will continue to reinvest in PEPP flexibly and plans to cease PEPP reinvestments by the end of 2024.Regarding the inflation outlook, the European Central Bank (ECB) has adjusted its rhetoric in its latest statement, expecting inflation to return to 2% "throughout" 2025, whereas previously it forecasted inflation to reach 2% in the second half of 2025.

The ECB has expressed its determination to ensure that the inflation rate returns to the 2% medium-term target in a timely manner. It will maintain policy rates sufficiently tight for as long as needed to achieve this goal. The Governing Council will continue to follow a data-dependent, meeting-by-meeting approach to determine the appropriate level of restriction and duration. In particular, its interest rate decisions will be based on its assessment of the inflation outlook, taking into account upcoming economic and financial data, underlying inflation dynamics, and the strength of monetary policy transmission. The Governing Council will not pre-commit to a specific interest rate path.

Analysts have indicated that there were no surprises in the ECB's interest rate decision this time. If inflation and PMI data for October and November continue to be unexpectedly downward, it is possible that a 50 basis point rate cut could occur at the next meeting in December. Given that this rate cut and more cuts (five cuts by the end of next year) have already been factored into European stock markets, the current earnings season is more likely to drive market trends.

The "rate cut storm" begins

The ECB has once again announced a rate cut on the grounds that the eurozone's "anti-inflation battle" has been won, but the economy is stagnating and there is even a risk of recession. Holger Schmieding, an analyst at Berenberg Bank, stated that trends in the real economy and inflation support the ECB in lowering interest rates.

The ECB can now finally claim to have almost brought under control the most severe inflation in a generation.

On October 17, data released by Eurostat showed that the eurozone's harmonized CPI for September was a final value of -0.1% month-on-month, in line with expectations and the previous figure; the eurozone's harmonized CPI year-on-year final value for September was 1.7%, lower than the expected and previous 1.8%; the eurozone's core harmonized CPI year-on-year final value for September was 2.7%, in line with expectations and slightly lower than the previous 2.8%.

This means that in September, eurozone business activity unexpectedly contracted, and the just-released CPI data shows that eurozone inflation has cooled, with the September harmonized CPI year-on-year final value falling below the ECB's 2% target for the first time since 2021.

The latest disclosed economic data has tipped the scales within the ECB towards a rate cut, and Wall Street economists believe that this will mark the beginning of a series of rate cuts by the ECB.

At the same time, high interest rates have suppressed investment and economic growth, and the eurozone's economic growth has struggled over the past two years. The latest data, including industrial output and bank loans, indicate that more of the same is expected in the coming months.The latest S&P Global Purchasing Managers' Index (PMI) survey and other data indicate a decline in the private sector output of the Eurozone, with the Eurozone's economic "engine"—Germany—facing the risk of a second consecutive year of economic downturn.

The German Ministry of Economics stated in a declaration that the German economy is expected to decrease by 0.2% in 2024, a significant revision down from the previously forecasted growth of 0.3%. The declaration also mentioned that the German economy stagnated in the first half of this year, and a series of recent disappointing indicators suggest that "economic weakness will continue into the second half of the year."

Data from the Federal Statistical Office of Germany show that Germany's GDP in 2023 actually decreased by 0.3% compared to the previous year. Analysts from Bloomberg believe that the German economy may already be in a technical recession, with the GDP shrinking by 0.1% in the second quarter of this year, and a possible further contraction in the third quarter.

Bert Colijn, Senior Economist at ING Bank Group, stated that with the Olympics concluded, the Eurozone's services PMI has resumed its downward trend, and there are currently few signs of recovery in the Eurozone economy.

In the face of the risk of a Eurozone economic recession, after a 25 basis point interest rate cut today, the money market expects that the European Central Bank (ECB) will have three more rate cuts by March 2025. Most ECB observers believe that rate cuts will be decided at each subsequent meeting.

Paul Hollingsworth, an analyst at BNP Paribas, said that the implied signal is likely that there will be another rate cut in December unless the data improves.

Goldman Sachs expects the ECB to cut rates by 25 basis points consecutively after the October rate cut, until the policy rate reaches 2% in June 2025.

Nomura Securities also predicted in a report that the ECB may start a series of consecutive rate cuts from October to June 2025, totaling a reduction of 175 basis points.