Market Analysis

Policymakers at the ECB argue for a rate cut in October

Amos Simanungkalit · 09 Oct 202420K Views

Several policymakers from the European Central Bank (ECB) advocated for another interest rate cut during a discussion on Wednesday, despite some colleagues expressing reservations due to the volatility in energy prices exacerbated by turmoil in the Middle East.

The ECB has already implemented two rate cuts this year, and financial markets are almost fully anticipating a reduction in the deposit rate from 3.5% on October 17. Investors expect the bank to quicken the pace of its policy easing in response to a weak economy and a faster-than-expected decline in price growth.

"A cut is very likely, and it won't be the last one; the timing will depend on how the battle against inflation unfolds," stated French central bank chief Francois Villeroy de Galhau during an interview with franceinfo radio.

This sentiment aligns with expectations, as over 90% of economists surveyed by Reuters predict a rate cut next week, with a similar majority expecting another reduction in December.

"Even if we see a 25 basis point cut now followed by another in December, we would still be at 3%, which remains highly restrictive," Greek central bank chief Yannis Stournaras explained to the Financial Times, endorsing consecutive rate cuts.

Policymakers from Finland, Latvia, and Portugal—Olli Rehn, Martins Kazaks, and Mario Centeno—have all supported an October rate cut, while ECB chief Christine Lagarde has hinted strongly at such a move, reinforcing market expectations.

The challenge is that the economy has been stagnant for much of the past year, with a softening labor market, slowing wage growth, and inflation decreasing more rapidly than the ECB had anticipated.

However, Belgium's Pierre Wunsch remains undecided, pointing out that while growth is sluggish, domestic inflation is still too high, and geopolitical tensions have driven energy costs up.

"Is there a decisive factor that necessitates opening the discussion in October? I would really like to see the central bank staff's analysis," Wunsch remarked in an interview with Belgian newspaper l’Echo.

Financial investors currently predict that the ECB's deposit rate will drop to 3% by the end of this year and further to 2% by the end of 2025, reaching what many in the financial community consider the neutral rate—one that neither stimulates nor constrains economic growth.