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The ECB is expected to continue with further rate cuts, the euro exposed to new declines

2024-10-19 10:05:46Biznes SHKRUAR NGA REDAKSIA VOX

The ECB is expected to continue with further rate cuts, the euro exposed to new

Economists and market analysts are in broad agreement that the European Central Bank (ECB) will continue to cut interest rates at every meeting for the foreseeable future, following Thursday's decision to cut rates by 25 basis points.

Here's what ECB watchers have to say about the rate cut decision and future outlook. Ruben Segura-Cayuela, European economist at Bank of America, highlighted the dour tone in Lagarde's remarks, particularly her focus on the risks of falling inflation.

"The fact that Lagarde told us there are more downside risks than upside to inflation is more meaningful," he said. He added that this clearly "leaves the door wide open for successive cuts", noting that the disinflation process is progressing well.

Segura-Cayuela expects rate cuts at each ECB meeting until the deposit facility rate reaches 2% by June 2025, followed by two quarterly cuts to bring it down to 1.5% by December 2025. He sees December 2024 as a critical moment, provided no significant shocks occur before then.

In their view, the ECB is likely to cut rates to just 2% by the end of 2025, a level generally considered neutral. However, they acknowledged the risk that the ECB could be forced below 2%, with markets currently seeing a 40% chance of that happening.

Goldman Sachs economists Sven Jari Stehn and Alexandre Stott predict another rate cut in December, seeing a cut of 25 basis points as "very likely". They pointed to recent weaker economic data as justification for continued cuts, saying the ECB is likely to cut rates by 25 basis points at each meeting to 2% by mid-2025.

However, they warned of potential downside risks to their forecast, suggesting the ECB could go even further if the data continues to deteriorate. BBVA analysts Alejandro Cuadrado and Roberto Cobo took a slightly more cautious tone, pointing to factors that could limit the ECB's aggressiveness.

"We expect both headline and core inflation to accelerate due to base effects, commodity prices and exchange rate factors," they said. This should prevent the ECB from pursuing a too aggressive rate-cutting path, barring any significant negative shock to growth.

The wider implications of the ECB rate cut are also being felt in currency markets, with Luca Cigognini, a market strategist at Intesa Sanpaolo, noting that "the euro remains exposed to further potential downside" as the ECB continues signal slower and declining growth. 

In conclusion, although the ECB remains non-committal on its future rate path, Lagarde's emphasis on flexibility and data dependency has economists predicting continued tapering in the coming months.


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