The European Central Bank (ECB) has cut interest rates for the second time this year, with the 25 basis points drop leaving the deposit facility rate at 3.50%.
It follows the previous 25 bps cut in June, which represented the central bank’s first cut in five years after rates climbed to 4%.
While the move was expected by market participants, industry commentators have turned their eye onto the future path of monetary policy on the continent.
Gurpreet Garewal, macro strategist for global fixed income at Goldman Sachs Asset Management, said that, with limited economic data expected by October’s meeting, she does not expect another cut until December unless there is a significant deterioration in regional or global growth.
“Looking further ahead, a faster easing cycle towards a lower terminal rate could occur earlier than current market pricing suggests,” she added.
“Over the summer, tourism, sporting events, and concerts boosted activity and inflation in the services sector, but both are expected to cool as the seasons change.
“Slowing wage growth has the potential to slow services inflation, which combined with growing downside growth risks, may prompt ECB officials to accelerate the pace of normalisation in 2025, compared to the quarterly pace adopted in 2024.”
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Salman Ahmed, global head of macro and strategic asset allocation at Fidelity International, also believes the next ECB rate cut will come in December.
“Although growth remains weak, as we are picking up from the signal in our activity trackers, the ECB remains more focused on inflation, which is its single mandate, and that has remained sticky particularly due to elevated wages and services inflation,” he said. “We see the next opportunity to assess this stance to be in December when the ECB has better visibility on wage growth in Q3-24.
“Accordingly, we expect the next 25bps cut to come in December, with the ECB likely staying on hold in October, which is more hawkish than the market is pricing. However, if wage growth continues to decelerate quicker than expected, we would expect clearer guidance towards a series of cuts that opens an accelerated pace of cuts in 2025 from currently one a quarter.”
Ann-Katrin Petersen, chief investment strategist for Germany, Austria, Switzerland, and Eastern Europe at the BlackRock Investment Institute, added: “Like the hiking cycle, this is not your typical cutting cycle: This is not a return to the world we once knew, where inflation was consistently well below the 2% target.
“With labour markets still tight and productivity weak, domestic price pressures could keep inflation near or above 2%, even if we think wage growth will cool further from current (still too high) levels.
“Given the ECB raised rates to highly restrictive levels, a steady pace of rate cuts over coming quarters would still leave policy weighing on growth. That’s even after accounting for what is likely now a higher neutral policy rate due to structural shifts.”
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