ECB Likely to Cut Rates

By Yoruk Bahceli and Stefano Rebaudo

(Reuters) – The European Central Bank (ECB) is poised to cut rates again on Thursday, but future outlook remains ambiguous due to a divided stance among policymakers regarding growth and inflation.

Soeren Radde, head of European economic research at hedge fund Point72, stated that while the rate cut is widely expected and uncontroversial, the messaging around it is critical.

Key Questions for Markets

1. ECB’s Decision on Thursday
Most analysts predict a 25 basis points cut in the deposit rate, with keen interest in indications of future moves. Markets have priced in potential cuts in December or even October, despite the absence of ECB support for consecutive cuts, as noted by Felix Feather of abrdn.

2. Inflation Concerns
The ECB is more relaxed about inflation compared to before, with the rate slightly above the target at 2.2%. However, doves caution that a slow response could risk falling inflation rates. The expectation is for inflation to rise to 2.5% by year-end, despite persistent core inflation.

3. New ECB Projections
The upcoming projections are expected to show lowered growth estimates and potentially higher core inflation as the ECB adjusts its outlook based on recent economic performance.

4. Impact of a Stronger Euro
The strong euro, which recently reached $1.12015, has a minimal effect on inflation control. Significant long-term increases would be necessary to influence economic conditions meaningfully.

5. Changes to ECB Rates System
The restructured rates system is unlikely to have immediate effects. A recent change lowers borrowing premiums, intending to stabilize money markets. With a high level of excess liquidity, the significance of these changes may evolve slowly over the following years.

In conclusion, clarity on the ECB’s long-term strategies regarding loans and bond-buying operations will be crucial as market participants await further details from the ECB.