ECB cuts rates by 25 bps

01.  What happened?

Since the beginning of its interest rate cut cycle, the ECB has reiterated the data dependence of its monetary policy decisions. After the first two key interest rate cuts, ECB President Christine Lagarde emphasised this approach, which hitherto seemed to include quarterly interest rate steps as the baseline scenario.

In recent weeks, however, more and more signals had been sent from ECB Governing Council circles that the data would support a potential further key interest rate cut in October. In particular, the ongoing weakness of European industry, as reflected in the PMI data, is likely to have influenced the decision-making process. In addition, the inflation rate fell more than expected in September from 2.2% to 1.7% due to lower energy prices. Core inflation also continued to approach the ECB's target zone at 2.7%, while services inflation remained at around 4%.

As a result, the financial markets had almost certainly already priced in the 25 basis point cut in each of the three key interest rates decided at today's ECB meeting. The rate for bank deposits at the ECB was set at 3.25%.

In its press release, the ECB stressed that the disinflationary process was on the right track and at the same time admitted that there had recently been some "negative surprises in the indicators of economic activity."

At her press conference, ECB President Lagarde stated that all data points published in recent weeks had pointed to a disinflationary process that is well on track. The ECB does expect inflation to pick up again somewhat at the end of the year. She also pointed to geopolitical risks that could potentially reverse the decline in inflation rates. However, Lagarde stressed that, in the ECB's view, growth and inflation risks are still clearly to the downside.

02.  How did markets react?

Members of the ECB Governing Council had recently increasingly communicated that an ECB interest rate cut at today's meeting was "very likely". This had therefore already been priced in in advance. However, Christine Lagarde's repeated emphasis on the downside risks to inflation and the economy triggered a moderate market reaction. Overnight index swaps are therefore now pricing in a not insignificant probability of an interest rate cut of 50 basis points for December 2024. The yields on two-year government bonds of Eurozone countries fell moderately, and the EUR weakened against the USD to its lowest level since August 2. The Eurostoxx 50 was around 0.9% higher. 

03.  What does it mean for investors?

ECB President Lagarde reiterated that the ECB makes its monetary policy decisions solely on the basis of inflation and economic data. And that these are reassessed at each individual meeting.

During her press conference, Christine Lagarde, however, emphasised the potential downside risks to the economy and that the inflation rate could potentially fall even more sharply in the medium term than the ECB had assumed in its September projection. On the other hand, Lagarde assessed the upside risks to price developments due to persistently high service inflation, possible supply chain problems, growing trade barriers or a stronger-than-expected economic recovery as being rather low.

Inflation data and data on purchasing managers' indices, among others, will be published twice before the December meeting, and these are likely to play a major role in the interest rate decision.

The U.S. elections on November 5 and the U.S. economic policy expected following the elections are also likely to be of greater relevance. An interest rate cut by the ECB in December is very likely. However, the interest rate path priced into the swap markets with a deposit rate of 1.8% in September 2025 currently still appears somewhat aggressive. Our baseline scenario is a deposit rate of 2.25% at that time.

Yields on short-term government bonds could still have slight downward potential in the Eurozone, but have recently followed the movements of U.S. yields. The stock markets are supported by the prospect of looser monetary policy. The EUR/USD rate also came under pressure today due to the U.S. retail sales data published at the same time. In the short term, it could primarily receive impetus from the approaching U.S. elections.