European Central Bank Signals Possible Interest Rate Cut

By Balazs Koranyi and Francesco Canepa

FRANKFURT (Reuters) — The European Central Bank (ECB) is becoming more confident that inflation will revert to its 2% target, as indicated by its president on Monday, hinting at a potential interest rate cut.

Following President Christine Lagarde’s comments, money market investors increased their expectations for a reduction in borrowing costs at the ECB’s meeting on October 17. This comes after a series of lower-than-expected reports on economic activity and inflation.

Lagarde stated, “The latest developments strengthen our confidence that inflation will return to target in a timely manner,” during a European Union parliamentary hearing in Brussels. She noted that this will influence the upcoming monetary policy meeting in October.

Recent national data suggests that inflation in the 20-nation euro area likely dipped below the ECB’s 2% target for the first time since mid-2021. Lagarde indicated that the overall reading for the euro zone would likely also fall short of the ECB’s baseline projections.

Furthermore, rising expectations for a 25 basis point rate cut in October have become nearly fully priced into money markets, a rise from a mere 25% probability early last week. Reportedly, policy doves within the ECB are gearing up to advocate for a rate cut due to a string of disappointing economic data.

Lagarde also acknowledged the ongoing weak growth trends, mentioning, “Looking ahead, the suppressed level of some survey indicators suggests that the recovery is facing headwinds,” at a regular hearing of the Committee on Economic and Monetary Affairs.

Despite this, she maintained the bank’s optimistic stance, asserting that the recovery should eventually strengthen, with rising real incomes expected to boost household consumption. Additionally, she noted that the labor market remains robust, contributing to some inflationary pressures through significant wage growth, although that growth is moderating, with corporate profits absorbing part of the wage increases.