ECB's Rate Cuts: Start of a Series Tonight?

On the global economic landscape, the adjustment of the European Central Bank's (ECB) monetary policy is undoubtedly a far-reaching move. With the decline in the eurozone's inflation rate and the slowdown in economic growth, the ECB is expected to cut interest rates again in the upcoming rate decision. This decision will not only affect the future direction of the European economy but may also trigger a chain reaction worldwide.

The rapid decline in the eurozone's inflation rate and the deterioration of the economy provide an urgent reason for the ECB to cut interest rates. The latest data show that the eurozone's inflation rate has fallen below 2% for the first time since 2021, and the slowdown in economic growth has further intensified concerns about the economic outlook. Against this backdrop, the ECB is expected to cut interest rates by 25 basis points at each meeting between October and April 2025, at which point the main deposit rate will reach 2.25%.

On Thursday (October 17), in the early Asian trading session, the euro fell against the US dollar, currently trading around 1.08. As of 11:15 Beijing time, the euro was quoted at 1.0857 against the US dollar, down 0.02%, with the previous trading day's close at 1.0859. The ECB seems to be on track to cut interest rates again on Thursday this week.

The money market has almost fully priced in three interest rate cuts before March next year. Economists expect the ECB to lower the deposit rate by 25 basis points at each meeting this week and before March next year. Respondents expect two more rate cuts in June and December next year, with the benchmark rate falling to 2%. This indicates that the market has a clear expectation of the ECB's interest rate path.

Mark Wall, Chief European Economist at Deutsche Bank, said: "If the ECB does not cut interest rates in October, the market will consider the central bank to be lagging behind the situation and may be making a policy mistake." Traders estimate the likelihood of a 25 basis point rate cut at around 90%, much higher than the 20% at the ECB's meeting last month. Unexpected contraction in business activity in the eurozone in September has led to a surge in bets for a rate cut in October. Investors are concerned that the ECB may not cut interest rates quickly enough. Some policymakers have already put forward reasons for a rate cut in October. Even ECB President Christine Lagarde has hinted at this, stating that confidence in the decline of inflation will be reflected in the central bank's decision.

The ECB's shift in focus from curbing inflation to protecting economic growth marks a significant change in its policy stance. The eurozone's economic growth has lagged far behind the United States for two consecutive years, making it a priority for the ECB to stimulate economic growth through interest rate cuts. On Thursday (October 17), in the early Asian trading session, the euro rose against the US dollar, currently trading around 1.08. As of 11:12 Beijing time, the euro was quoted at 1.0860 against the US dollar, up 0.01%, with the previous trading day's close at 1.0859. Analysts at Deutsche Bank Research said that the market widely expects the ECB to cut interest rates today, which will be the first consecutive rate cut in this cycle, thus "marking the entry into a faster easing cycle."

The ECB's policy outlook faces many risk factors, including the Federal Reserve's easing policy and conflicts in the Middle East. These factors could all influence the ECB's decision-making, increasing the uncertainty of the economic outlook. On Thursday (October 17), in the early Asian trading session, the euro rose against the US dollar, currently trading around 1.08. As of 11:06 Beijing time, the euro was quoted at 1.0860 against the US dollar, up 0.01%, with the previous trading day's close at 1.0859. The ECB's meeting minutes showed that ECB policymakers seemed satisfied with the decline in inflation at last month's meeting, but given the ongoing pressures, they advocated for a gradual easing of policy.The Federal Reserve's interest rate cut expectations have influenced the European Central Bank's policy decisions. As the Federal Reserve accelerates its pace of rate cuts, the European Central Bank may follow suit to maintain the coordination of monetary policy. However, the policy direction of the Federal Reserve also increases the external pressure faced by the European Central Bank. On Thursday (October 17th), in the early Asian session, the US Dollar Index was reported at 103.51, down 0.03%, with an opening price of 103.54. Over the past week, several Federal Reserve officials have expressed different views on future rate cuts and economic prospects, further intensifying the sustained upward momentum of the US dollar.

The European Central Bank faces a significant challenge in seeking a balance between controlling inflation and economic recovery. Although the inflation rate has fallen, the stagnation of economic growth in the Eurozone requires the European Central Bank to be more cautious when formulating monetary policy. On Thursday (October 17th), in the early Asian session, the euro rose against the US dollar and is currently trading near 1.08. As of 10:33 Beijing time, the euro-US dollar quote was 1.0860, up 0.01%, and the previous trading day's closing quote for the euro-US dollar was 1.0859. ING Bank currency strategist Jane Foley said in a report that although the European Central Bank may be cautious about future rate cuts due to high service sector inflation at Thursday's meeting, the euro may appreciate in the short term, but its short-term gains are unlikely to be sustained. Against the backdrop of a complex and rapidly changing global political and economic environment, the outlook for the European Central Bank's monetary policy is full of uncertainty. Economists expect that the European Central Bank will accelerate the pace of rate cuts in the coming months to stimulate the economy.

Overall, the European Central Bank's decision to cut interest rates is a direct response to its slowing economic growth and falling inflation. However, the policy direction of the Federal Reserve and factors such as conflicts in the Middle East may all impact the policy outlook of the European Central Bank. Investors need to closely monitor these changes and adjust their investment strategies according to market dynamics.