The European Central Bank is set to deliver its second consecutive rate cut this Thursday. The Governing Council will convene in Ljubljana, Slovenia, with most analysts projecting a 25 basis point decrease that would lift the deposit facility rate to 3.25 percent. The move aims to reinforce disinflation progress and support European growth amid a soft economic backdrop.
This marks the second rate reduction this year and the third since the start of 2024, moving away from the quarterly rhythm that had defined policy after reductions in June and September. It would be the ECB’s first move without accompanying new macro projections, signaling growing confidence that the disinflation path remains intact.
Inflation in the euro area slowed to 1.8 percent year over year in September, the third straight monthly decline. This reading sits four tenths below August and is the weakest since May 2021. Meanwhile, eurozone GDP rose 0.2 percent in the second quarter, a touch softer than the early months of 2024, with forecasts for Germany pointing to a weaker path in 2024.
If markets stay on track, the main refinancing rate and the one-day credit facility could fall to 3.4 percent and 3.65 percent respectively.
Analysts Agree on the Outlook
Konstantin Veit, economist at PIMCO, notes that while the ECB had earlier signaled a December move, the weaker macro backdrop may have given the Governing Council enough confidence to diverge from the quarterly pace of rate cuts.
Luis Merino, head of Fixed Income, Mixed Funds and Fund Selection at Santalucía AM, argues that the current macro setup will allow authorities to continue the rate-cut cycle started on both sides of the Atlantic. He expects two additional 25 basis point reductions this year for the ECB and the Federal Reserve.
From Ebury’s perspective, while a 25 basis point cut looks priced in for this week, the decision may have little immediate impact on the euro. The focus will be on the bank’s communications, particularly the tone on growth prospects. Any sign of increased concern among policymakers could indicate the ECB is willing to move faster than markets currently anticipate.
The broader market view in North America will also reflect how the ECB path interacts with the Federal Reserve’s stance and with the Bank of Canada’s policy outlook. A softer euro could influence import prices and currency hedges for Canadian and American borrowers, while a lower rate path may support cyclical sectors sensitive to credit conditions.
Investors should monitor new signals from policymakers, as the ECB’s communications may refine expectations for the timing and pace of future moves. If inflation continues to decelerate and growth remains fragile, even a forward-leaning tone could support continued easing, albeit at a measured pace.