Chart of the Week: ECB may cut its policy rates further

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The Governing Council of the European Central Bank decided on 12 September to lower the deposit facility rate, through which it transmits monetary policy, by 25 basis points. The rate will decrease to 3.5% with effect from 18 September. The bank said it had based its decision on the improving outlook for underlying inflation. Christine Lagarde, the ECB president, said core inflation was expected to decline rapidly from 2.9 per cent this year to 2.3 per cent in 2025, and to 2 per cent in 2026. The bank hopes the gradually fading effects of restrictive monetary policy will support consumption and investment, at a time when economic growth is sluggish across the EU. The economy grew by 0.2 per cent in the second quarter, after 0.3 per cent in the first quarter, falling short of the bank’s projections. The ECB’s core mandate is price stability – but with the forward look for inflation on a falling path, there has been room to cut rates, providing stimulus. While the council is expected to hold rates steady at its next meeting on 17 October, it seems likely it will cut rates by a further 25 basis points on 12 December. Even the ECB’s hawk, Robert Holzmann, the governor of the Austrian central bank, backs easing now. Holzmann was the sole dissenter from the council’s decision to cut rates in June, but now feels monetary policy and inflation are on a good trajectory, with room for a further quarter-point cut in December – barring major shocks.

The views expressed in this article are the views of the author, not necessarily those of LSEG.

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