By
Jamie ChisholmFollow
Published: Sept. 11, 2024 at 6:03 a.m. ET
European Central Bank (ECB) President Christine Lagarde gestures as she addresses a press conference on the Eurozone’s monetary policy, at the central bank’s headquarters in Frankfurt am Main, western Germany, on July 18, 2024.Photo: Kirill Kudryavtsev/Agence France-Presse/Getty Images
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The European Central Bank is expected to trim borrowing costs again on Thursday as its focus continues to shift from damping inflation to supporting the bloc’s faltering economy.
Markets imply the ECB will cut its main deposit rate by 25 basis points to 3.50%, following up a similar sized reduction in June, which was the first of this easing cycle.
The single-currency’s central bank began a series of rate hikes in July of 2022, starting from minus 0.5% and culminating in a record rate of 4% by September last year, as it tried to subdue rampant inflation following the COVID-19 pandemic and a jump in energy prices after Russia’s full-scale invasion of Ukraine.
However, now inflation, which peaked at more than 10% in late 2022, is down to 2.2%, just a fraction above the ECB’s 2% target. This means the central bank will consider itself increasingly more able to aid the weak eurozone economy by reducing borrowing costs.
Indeed, economists at Nomura, led by Andrzej Szczepaniak, note that data since the ECB’s July meeting show the eurozone economy has performed worse than the central bank’s officials predicted at the time.
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“Business surveys continue to weaken, amplifying near-term adverse economic growth concerns. Moreover, Germany risks tipping into recession, and some firms could be forced to shutter as a result of having to absorb rising input costs into profit margins,” said Nomura.
Sticky services sector inflation in the eurozone and a desire not to get too far ahead of the Federal Reserve in its monetary easing cycle means the ECB is likely to continue a pattern of staggered rate cuts, according to a team of economists at Goldman Sachs headed by Sven Jari Stehn.
“We maintain our forecast for a pause in October and a third cut at the December meeting,” said the Goldman team. “The Governing Council will receive little data by October to shift the narrative and catalyze sequential rate cuts. That said, an October cut is possible with significant downside surprises in the domestic and foreign data.”
The ECB will reveal its policy decision at 2:15 p.m. in Frankfurt (8:15 a.m. Eastern) on Thursday, and President Christine Lagarde will start a press conference half an hour later.
“We expect her to emphasize data dependence when asked about the path ahead, but acknowledge that further rate reductions are likely to be appropriate if the disinflation process remains on track, as embedded in the staff projections,” said the Goldman team.
“When asked about the Fed, we look for Lagarde to reiterate that ECB policy is determined by domestic data but that shifts in the U.S. economy matter for the ECB to the extent that they affect the Euro area inflation outlook,” Goldman added.
Anticipation of more ECB rate cuts has helped push the 2-year German government bond yield
down to 2.16%, the lowest since December 2022.
The euro
on Wednesday was trading at $1.10460. The STOXX Europe 600 index
was up 0.2%.