The European Central Bank announced a 25-basis-point interest rate cut on Sept. 12, making a highly anticipated move amid cooling economic data.
However, money managers warned that the outlook remains highly uncertain.
The ECB’s governing council lowered the deposit facility rate — the rate through which it steers its monetary policy stance — to 3.5%, effective Sept. 18. The move was made based on an updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission. The bank concluded that “it is now appropriate to take another step in moderating the degree of monetary policy restriction.”
While recent inflation data has been broadly trending as expected, tracking downward toward the 2% inflation target that the governing council works towards in setting monetary policy, it is expected to average 2.5% this year, 2.2% in 2025 and 1.9% in 2026. The eurozone economy is expected to grow by 0.8% this year, by 1.3% in 2025 and by 1.5% in 2026.
The other main rates for the ECB, the marginal lending facility and main refinancing operations, were also cut, but by different values due to changes to the operational framework around the implementation of monetary policy in the bloc. Effective Sept. 18, the marginal lending facility will be cut to 3.9%, from 4.5%; and the main refinancing operations rate will drop to 3.65% from 4.25%.
“A rate cut at this meeting wasn’t in doubt,” said Hussain Mehdi, director, investment strategy at HSBC Asset Management, in an emailed comment. “Cooling economic data in the bloc — especially a big drop in wage growth — and a dramatic repricing of U.S. rate expectations over the summer has weakened the hawks’ influence in our view.”
However, Mehdi warned that the outlook remains “highly uncertain," and the risk of a hard landing remains "fairly high as policy rates remain in restrictive territory. Market volatility is likely to be a key feature heading into 2025.”
The apparent return to “perma stagnation for Germany and weakness” for the broader eurozone mean a move not to cut rates “would have been a painful shock,” said Seema Shah, chief global strategist at Principal Asset Management, in an emailed comment.
“While the lack of forward guidance indicates the forward path is not yet decided, the slight deterioration in growth forecasts suggests the hurdle to lowering rates next month may not be that high. Domestic demand weakness should eventually put downward pressure on wage costs, relieving some of their inflation concerns. Given downside risks and currency impacts, it is likely the ECB will need to fall in line and match the regularity of Fed cuts by early 2025," Shah added.
In June, the ECB moved ahead of the Fed and the Bank of England to cut rates. The BOE followed in August.
