ECB Reduces Rates in Support of Shrinking European Economy
In line with predictions from economists, the European Central Bank (ECB) has reduced its three key rates by 25 basis points for the second meeting in a row. This move is aimed at supporting the rapidly contracting European economy. The ECB stated that the cuts were made due to incoming information on inflation, which indicates that the disinflationary process is progressing as expected. The bank also noted that the inflation outlook has been impacted by recent downside surprises in economic activity indicators, while financing conditions continue to be restrictive.
The ECB has reduced its Marginal Lending Facility from 3.90% to 3.65%, the Refinancing rate from 3.65% to 3.40%, and the Deposit Rate from 3.50% to 3.25%.
Key Points from the ECB Statement
Inflation
The statement highlighted that domestic inflation remains high, with wages continuing to rise at a significant pace. It is expected that inflation will increase in the coming months before declining to target levels next year. The disinflationary process is reportedly on track.
Labor Market
The statement also addressed labor cost pressures, which are expected to continue easing gradually. Profits will partially buffer their impact on inflation.
Guidance
The ECB plans to keep policy rates sufficiently restrictive for as long as necessary. The Governing Council is not committing to a specific rate path, and data will determine the level and duration of restriction.
ECB's Unchanged Guidance
The Governing Council is determined to ensure that inflation returns to its 2% medium-term target in a timely manner. It will keep policy rates sufficiently restrictive for as long as necessary to achieve this aim. The Council will continue to follow a data-dependent and meeting-by-meeting approach to determining the appropriate level and duration of restriction.
Some observers have noted that the only significant change in the statement's wording is the line around inflation being at 2% in the course of 2025, as opposed to in H2-2025. This could potentially be an acknowledgement of recent HICP progress.
Reactions to the ECB's Decision
Bloomberg Intelligence European Equity Strategist Laurent Douillet commented on the ECB's decision, stating that it was not surprising. He added that a 50-basis point cut at the next meeting in December is a possibility if the two inflation and PMI prints of October and November continue to surprise on the downside.
The current earnings season is more likely to dominate market movements, with this rate cut and many more -- five by the end of next year -- already priced into European equities.
The EURUSD showed virtually no reaction to the ECB's decision, as the bank acted as expected.
Looking Forward
From the upcoming press conference, signs of dissenting voices on the decision will be sought. The continued inclusion of the line that it will 'keep policy rates sufficiently restrictive for as long as necessary' could be seen as a nod to the hawks to appease them against the cut. Any disagreement on the board may become clearer from source reports than the Q&A itself.
Bottom Line
The ECB's decision to cut rates is a strategic move to support the struggling European economy. The bank's commitment to maintaining restrictive policy rates as long as necessary demonstrates its determination to achieve its inflation target. This decision, however, may not be without dissent, and it will be interesting to see how this plays out in the upcoming press conference. What are your thoughts on the ECB's rate cuts and its impact on the European economy? Feel free to share this article with your friends and sign up for the Daily Briefing, which is available every day at 6pm.
