ECB to Speed Up Support

Above: EP Monetary Dialogue with Christine Lagarde, President of the ECB. Photographer: Denis LOMME. Copyright: © European Union 2024 - Source: EP.

The European Central Bank (ECB) will speed up the pace as it cuts interest rates, according to economists.

"We change our ECB call and now expect a rate cut in October, followed by back-to-back cuts of 25bp each, taking the deposit rate back to 2.00% by June 2025, a quarter earlier than our previous forecast," says Ruben Segura-Cayuela, Europe Economist at Bank of America in Madrid.

Bank of America's call comes after the European Central Bank's President told the European Parliament that October was in play for an interest rate cut.

Christine Lagarde said core inflation in the Eurozone is on a downward trend, and there is reason to believe service prices are also abating.

"We're not going to wait" until everything is at 2% to reduce rates, she said while also acknowledging that the Eurozone labour market was showing signs of lower activity.

Following the ECB's recent September decision to cut interest rates, markets and economists thought the ECB would opt to cut rates at quarterly intervals to closely monitor the labour market, wages and their effects on core inflation.

"We thought the ECB would, at the margin, prefer to wait for more data confirmation and hence skip October," says Segura-Cayuela.

In testimony to the Committee on Economic and Monetary Affairs of the European Parliament Lagarde said:

"Looking ahead, inflation might temporarily increase in the fourth quarter of this year as previous sharp falls in energy prices drop out of the annual rates, but the latest developments strengthen our confidence that inflation will return to target in a timely manner. We will take that into account in our next monetary policy meeting in October."

Segura-Cayuela says this is the same justification she used for the September cut, and thereby a quasi-clear "go" for October, absent data surprises until then.