ECB Rate Cut Highlights

FRANKFURT (Reuters) – A European Central Bank (ECB) rate cut last month was seen as an insurance move against unexpectedly low inflation, but policymakers appear divided on the risk of excessively low price growth. The accounts of their Oct 16-17 meeting showed this on Thursday.

The ECB cut rates for the third time this year in October, indicating that further easing is on the horizon given a weak economy and diminishing price pressures, with the timing and size of policy moves still open for discussion.

> "Acting now could provide insurance against downside risks that could lead to an undershooting of the target further ahead and would support a soft landing," the ECB stated, acknowledging that only limited new information was available.

If the indicators were just a temporary anomaly misleading expectations about weak inflation, the bank might avoid a rate cut in December, the accounts suggested.

> "If the slowdown signalled by indicators of economic activity and the downside surprise to inflation proved to be temporary, a decision to cut rates now could, ex post, turn out as merely having brought forward a December cut," the ECB added.

However, there appeared to be disagreement among policymakers over the severity of price pressures.

While consensus indicated inflation would reach 2% earlier than previous projections for late 2025, opinions diverged on subsequent trends.

One group argued that the possibility of undershooting the target was unlikely, stating,

> "Such a scenario of undershooting probably required a combination of factors that were not yet present," emphasizing the need for disappointing economic growth, a weakening financial system, fading wage pressures, and a downward adjustment in inflation expectations.

In contrast, another group viewed the inflation outlook more pessimistically, suggesting that the ECB risked going below its target, which is as undesirable as overshooting it.

> "This could now be seen as a greater risk than overshooting the target," they concluded, citing downside inflation surprises and swift changes in market expectations as indicators of increasing risk of sustained undershooting.