As expected, last week the ECB announced a 25 basis point (bps) rate cut, bringing the deposit facility rate to 3.25%. The decision was based on recent economic data showing that inflation is converging towards the target and that inflationary pressures, particularly in the labour market, are easing as a result of weaker-than-expected growth.
When asked whether a 50 bps cut had been discussed, given the weak economic outlook and its impact on inflation, Lagarde dismissed the idea and confirmed that the October decision was unanimous.
Inflation is expected to rise towards the end of the year due to base effects from last year’s sharp declines in energy prices, and then continue to ease, reaching the target “over the course of next year.” Lagarde stressed that rates remain restrictive and that wages are still rising at a strong pace, but noted that labour-market forces driving inflationary pressures are weakening. However, she also described the labour market as still “resilient.”
The Governing Council considers that economic growth has been particularly weak in both the manufacturing and services sectors. Consumption is declining and savings are increasing. Even so, Lagarde reiterated that the central bank’s baseline scenario remains a soft landing, stressing that, based on the information currently available, the region is not expected to enter a recession. On this point, the ECB President added that the regional economy is expected to recover as external demand improves.
The central bank provided no guidance on future ECB decisions and reiterated that upcoming decisions will continue to be data-dependent and taken on a meeting-by-meeting basis.
Most likely based on expectations that weaker-than-anticipated growth could result in inflation falling below the 2% target, prompting the ECB to cut rates faster than expected. Following the meeting, markets began to price in more than one rate cut by year-end, which, with only one meeting remaining, would imply a sizeable 50 bps cut by December.
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