The European Central Bank (ECB) may cut interest rates again on Thursday, stating that inflation in the eurozone is currently being increasingly controlled and the economy is falling into stagnation. This will be the first time in 13 years that the eurozone's central bank has cut interest rates consecutively, marking a shift in its focus from curbing inflation to protecting economic growth. The eurozone's economic growth has been significantly lagging behind the United States for two consecutive years.
The latest economic data may tip the scales within the ECB in favor of a rate cut, as business activity and confidence surveys, as well as inflation data for September, were slightly lower than expected. Following the release of the data, several ECB spokespeople, including ECB President Christine Lagarde, hinted that another rate cut might occur this month, leading investors to fully price in this move.
Berenberg Bank economist Holger Schmieding stated, "The trends in the real economy and inflation support the rationale for a rate cut."
A rate cut of 25 basis points on Thursday would reduce the interest rate the ECB pays on bank deposits to 3.25%, and the money market has almost fully digested the expectation of three more rate cuts by March 2025.
Lagarde and her colleagues are unlikely to give clear hints about future actions on Thursday, reiterating their statement that decisions will be made "on a meeting-by-meeting basis" depending on future data.
However, most ECB observers believe that rate cuts at each meeting have become a foregone conclusion.
BNP Paribas economist Paul Hollingsworth said, "The implicit signal may be that unless the data improve, another rate cut is very likely in December."*Inflation and Economic Growth*
The European Central Bank can finally claim that it has almost tamed the most severe round of inflation in a generation. Last month, prices only rose by 1.8%. Although by the end of this year, the inflation rate may slightly exceed the European Central Bank's 2% target, it is expected to hover around this level, or even slightly lower, for the foreseeable future.
However, the economy has had to pay a high price for this. High interest rates have weakened investment and economic growth, and the European economy has been struggling for nearly two years. The latest data, including industrial output and bank loans, indicate that more of the same is expected in the coming months.
The unusually resilient labor market is now also beginning to show some cracks, with the vacancy rate (the proportion of vacant positions to total positions) falling from a record high.
This has fueled calls within the European Central Bank for policy easing before it's too late. "Now we face a new risk: inflation below the target rate, which could suppress economic growth," said Mario Centeno, the governor of the Bank of Portugal, recently. "Fewer job opportunities and less investment will increase the already pressured expenditure ratio."
The problem is that part of this weakness is due to structural issues, such as high energy costs and low competitiveness that are dragging down Europe's industrial powerhouse, Germany.These issues cannot be resolved solely by lowering interest rates, although reducing interest rates can lower the cost of capital, thereby providing marginal assistance.
"We must not ignore the headwinds to economic growth," said Isabel Schnabel, a member of the Executive Board of the European Central Bank. "At the same time, monetary policy cannot solve structural problems."
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