By Yoruk Bahceli and Stefano Rebaudo

(Reuters) – The European Central Bank (ECB) appears ready to implement another interest rate cut this Thursday, despite previously showing reluctance just weeks ago.

Data indicates that the euro zone economy is in a worse state than during the last ECB meeting, increasing expectations for more rapid rate cuts than the quarterly pace established by previous cuts in June and September.

Mark Wall, chief European economist at Deutsche Bank, stated, "If the ECB does not cut in October, the market will believe that the central bank is behind the curve and possibly making a policy error."

Five Key Questions for Markets:

1. Will the ECB cut rates this week?

All signs point to yes. Traders are estimating around a 90% chance of a 25 basis-point cut, a significant rise from 20% during last month's meeting. A contraction in euro zone business activity in September led to heightened expectations that the ECB might not act quickly enough.

Several policymakers have advocated for an October rate cut, with ECB chief Christine Lagarde also hinting at one, suggesting that confidence in falling inflation will influence the bank's decision.

2. Is this the start of back-to-back rate cuts?

Economists on Wall Street believe it is. Traders anticipate just over three cuts in the four meetings following October. However, ECB policymakers are more cautious. Finnish governor Olli Rehn emphasized that decisions on the pace and extent of future cuts will be made on a meeting-by-meeting basis. Lagarde may indicate a change in direction as projections are due in December, according to Gilles Moec, chief economist at AXA.

3. Is inflation no longer a concern for the ECB?

Traders seem to believe so, as inflation has dropped below the ECB's 2% target as of September. Even persistent services inflation has slightly decreased, reaching its lowest monthly adjusted rate since November 2023. Derivatives used for hedging inflation risk imply that price growth could remain below 2% from the first quart of the upcoming year, quicker than the ECB's projections from September.

Nevertheless, services inflation remains at 4%, and the recent drop in headline inflation was primarily driven by energy prices, preventing the ECB from claiming victory just yet.

4. Is growth the ECB's main concern now?

Yes, that concern is growing. But since the ECB is focused solely on inflation, the challenge lies in whether stagnation might consistently keep inflation below target. The ECB is optimistic that rising real incomes will improve consumption, projecting growth at 1.3% next year, up from 0.8% this year—a forecast that some economists consider too optimistic, especially as Germany faces a second year of contraction.

Moec from AXA warns that if expected growth does not occur soon, inflation risks undershooting the ECB's target—an unease shared by some policymakers.

5. Are geopolitical risks worrying for the ECB?

Yes, but mainly regarding growth issues. Oil prices have risen over 9% since early October amid the Israel-Hezbollah conflict, though they remain substantially below this year's peak. Since inflation is currently low, the ECB can withstand temporary energy-driven price increases, according to Paul Hollingsworth from BNP Paribas.

Hollingsworth noted, "The ECB's focus has shifted more towards growth risks, meaning geopolitical concerns would only exacerbate these worries."

Importantly, Thursday marks the ECB's last meeting before the November U.S. presidential election. Should former Republican President Donald Trump win and impose a 10% tariff on all imports, it would adversely affect euro zone growth and strengthen the case for deeper rate cuts, say economists.