The European Central Bank on Thursday, October 17, decided to cut interest rates again.
It is worth noting that the mentioned financial regulator has already lowered the cost of borrowing for the third time in the current year. Commenting on the decision to continue the process of consistent easing of the monetary policy strategy, the European Central Bank said that inflation in the eurozone is increasingly under control. Also, in this context, the financial regulator separately noted that the economic outlook in the mentioned region has deteriorated.
The consistent cutting of interest rates in the eurozone is evidence of a shift in the European Central Bank’s focus from bringing down inflation to protecting economic growth. It is worth noting separately that the corresponding growth has been significantly lagging behind the intensity of the pace of a similar process in the United States for two years in a row. The current back-to-back lowering of borrowing costs in the eurozone is the first in the last 13 years in the region.
The European Central Bank said that incoming information about the inflationary process in the mentioned region indicates that disinflation is well on track. This financial regulator also separately noted that the inflation outlook is impacted by data signaling an unexpected deterioration in economic activity indicators.
According to the media, it is most likely that the latest information about the state of affairs in the economic space and the prospects for the further dynamic of the corresponding situation have become the main argument for officials of the European Central Bank in favor of making another decision on lowering the cost of borrowing. In this case, the results of the business activity survey should be noted. HCOB’s composite Purchasing Managers’ Index compiled by S&P Global in September in the eurozone was fixed at 49.6. It is worth noting that in August the corresponding figure was 51. Last month, for the first time in six months, this index fell below the 50 mark, which separates growth from contraction. At the same time, analysts surveyed by the media predicted that the corresponding figure would be 48.9.
Inflation data was also likely another factor impacting the decision of the European Central Bank on another lowering of the cost of borrowing. In September, in the eurozone, this indicator fell below the 2% mark for the first time since mid-2021. The corresponding result signals that the efforts of the financial regulator to combat the rapid rise in prices are likely near its end. In September, inflation in the eurozone was fixed at 1.8%. In August, this figure was 2.2%. Analysts who were interviewed by the media predicted that inflation in the eurozone in September would be fixed at 1.9%. It is worth noting that the target of the European Central Bank is 2%.
On Thursday, the mentioned financial regulator decided to cut the rate that it pays on banks’ deposits by a quarter of a percentage point. Now this indicator is at 3.25%. The money markets are currently dominated by the view that the European Central Bank will make three more decisions on cutting the specified rate through March next year.
The new marginal lending rate is now at 3.65%. The new rate for the main refinancing operations is 3.4%.
It is worth noting that the European financial regulator, as part of its statement on the next lowering of the cost of borrowing, refrained from any wording regarding the most likely further actions in the context of monetary policy. This tactic concerning communication with the public is, in a certain sense, standard for the bank. In the official statement of the financial institution, it was noted that the following decisions regarding monetary policy will be made based on incoming information. This approach assumes that the European Central Bank is guided by a dynamic economic situation and does not act within the framework of a pre-approved concept. In the official statement of the financial regulator, it was separately noted that the Governing Council will keep policy rates sufficiently restrictive for as long as necessary.
The euro showed a weakening against the US dollar after it became known that the European Central Bank made another decision to lower the cost of borrowing. This currency fell 0.5%.
Investors are currently interested in any, even the most abstract hints about the further actions of the mentioned financial regulator in the context of monetary policy.
According to media reports, the European Central Bank may make a statement that it has managed to curb the surge in inflation, which turned out to be the strongest in at least the last generation. Last month, prices in the eurozone, as it above-mentioned, rose by just 1.8% for the first time in three years. At the same time, it is too early to make statements that the corresponding inflation rate will vary within the mentioned indicator in the long term. According to media reports, the opinion is currently spreading among analysts and experts that price growth in the eurozone may accelerate to more than 2% by the end of the current year. Also, the relevant point of view provides that the specified potential indicator is likely to be observed for a long period.
The European Central Bank has emphasized that pay hikes are still supporting domestic inflation. In this context, it implies an increase in prices for goods and services that do not rely much on imports. The mentioned financial regulator also stated that the pressure on labor costs is expected to continue moving on a gradual downward trajectory. In this context, it was separately underlined that profits will partially buffer the impact of this factor on inflation.
It is worth noting that the fight against inflation, despite significant progress in the relevant efforts, has certain negative consequences. For example, in this context it is meant that. that high interest rates have become a deterrent in terms of economic growth opportunities. Also, the corresponding circumstance became an impulse of a negative impact on investment activity. Economic growth in the eurozone has been characterized by weakness over the past two years. In the coming months, the situation formed by the mentioned factors is likely to worsen.
In August, industrial production in the eurozone showed growth of 1.8% on a monthly basis. This indicator also increased by 0.1% compared to the result for the same period last year. The corresponding result is associated with an increase in demand for capital and durable consumer goods.
It is worth noting that the situation in the labor market in the eurozone is currently deteriorating, which has recently demonstrated stability. The vacancy rate is on a downward trajectory. It is worth noting that this indicator is falling after reaching record-high levels.
Portuguese central banker Mario Centeno said this month that the eurozone is currently facing a new risk, which is an undershooting inflation target containing the potential to become a factor in slowing economic growth. According to him, fewer jobs and a decrease in investment volumes will exacerbate the losses already incurred.
To a large extent, the current condition of the eurozone economic system in its unfavorable manifestations is associated with structural problems, which include high energy costs and low competitiveness. It is worth noting that these factors constrain the development opportunities of the industrial powerhouse of Europe, which is Germany.
Cutting interest rates is not enough to solve the mentioned problems. At the same time, this tool still has significant effectiveness. Lowering the cost of borrowing makes the cost of capital cheaper.
European Central Bank board member Isabel Schnabel stated that it is impossible to ignore the factors that hinder economic growth. She also noted that monetary policy cannot resolve structural issues.
The president of the European Central Bank, Christine Lagarde, said at a press conference on Thursday, which was held on the occasion of another interest rates cut, that the latest data indicate more sluggish growth in the eurozone economy. Also in the relevant context, she noted that the current state of affairs in the space of the mentioned region’s economic system is weaker compared to preliminary expectations regarding the dynamic of the corresponding situation. To a certain extent, these comments are an official statement of the sensitive impact of the above-mentioned problems. Also, against the relevant background, there are arguments in favor of assertions that the prospects for the economic system of the eurozone are clearly not absolutely positive or guaranteed to be favorable. The problems can be solved, but the already materialized fact of their impact, which has sensitive negative consequences, indicates that the path to a better state of affairs will not be a task, the implementation of which will be simple and will not require significant efforts.
Christine Lagarde, commenting on the latest indicators of economic activity in the eurozone, said that these data are also weaker than preliminary expectations. In this context, she separately noted that investment and consumption continue to be weak. Also, the president of the European Central Bank said that the corresponding characteristic is currently relevant for exports. According to her, the mentioned financial regulator expects that the upward dynamic of real incomes will help consumption. Also, according to her statement, the looser monetary policy concept will support investment activity.
Moreover, during the press conference, appeals to the countries of the European Union were recorded. Christine Lagarde called on the governments of the respective states to take measures to boost the economy. Also, in the context of the relevant semantic message, she stated that the mentioned governments should commit themselves to the rapid implementation of new fiscal rules.
Separately, Christine Lagarde drew attention to the fact that inflation in the European services sector in September was fixed at 3.9%. This indicator showed a decrease. It is worth noting that inflation in the European services sector has fallen below the 4% mark for the second time in the last two years. Christine Lagarde also noted that most of the latest indicators of underlying inflation in the eurozone either decreased or showed no changes, remaining within what can be conditionally described as a kind of zero dynamic.
According to the president of the European Central Bank, price growth in the mentioned region is currently expected to accelerate in the coming months. She said that the corresponding tendency will be partly because sharp falls in energy prices will drop out of the annual rates.
Commenting on the growth prospects of the eurozone economy, Christine Lagarde said that the risks regarding these perspectives remain tilted to the downside. In this context, she drew attention to the likelihood of a decrease in confidence, which will hinder investment activity and the upward trajectory of the dynamic of consumption. Christine Lagarde also mentioned the risks associated with the present state of affairs in the area of geopolitics. It is worth noting that currently there is a tendency for a consistent increase in tension in the specified space. The corresponding situation has an impact on the international trade sector, which is an additional risk factor for the prospects of the eurozone economic system, which was also mentioned by Christine Lagarde. Separately, she drew attention to the current weakness of the global economy.
Christine Lagarde said the European Central Bank still sees two-sided risks to inflation. In this context, she mentioned wages that are higher than expected. Christine Lagarde also noted the weaker economic growth that generates downside risks. According to her, some policymakers began to worry about another undershooting in inflation in the medium term. In this context, she separately noted that September accounts stated that the risk of the target being undershot further out in the projection horizon was becoming more significant.
Christine Lagarde said that since the last meeting of officials of the European Central Bank, all indicators have been on a downward trajectory. According to her, the corresponding dynamic confirmed the confidence of the mentioned financial regulator that the disinflationary process is well on track. She also said that Thursday’s decision is proof that the European Central Bank is really data-dependent.
Besides, Christine Lagarde referred to the results of the corporate telephone survey conducted by the mentioned financial regulator as a sign that disinflation is well on track.
The president of the European Central Bank said that officials will receive more data by December, some of which is soft and some are hard, and more readings. According to her, the relevant information will help to decide on the appropriate monetary policy stance. Probably, in this case, it means striving for maximum compliance of monetary policy with the circumstances and conditions shaping the economic situation.
Also, in the context of commenting on the dependence of the European Central Bank on data, Christine Lagarde said that the upcoming information will help make a December decision, but it is not a guidance. According to her, the October decision to cut interest rates by 25 basis points is unanimous. Against the background of this statement, the euro continued to fall. This currency fell below the $1.0830 mark for the first time since August 2. Perhaps, in this case, there was a signal that spot traders needed to re-engage on shorts.
Money markets, against the background of Christine Lagarde’s statements, extended their expectations regarding the extent of continued monetary easing by the European financial regulator in December and January.
The president of the European Central Bank stated that risks to inflation are more on the downside and not on the upside. Answering a political question about the likely economic consequences of Donald Trump’s potential victory in the United States presidential election next month, Christine Lagarde said that any trade restrictions would matter for the eurozone. Also, in the relevant context, she separately noted that any additional obstacles are a risk from the point of view of economic growth prospects.
As part of a response to a question about the potential lowering of borrowing costs in December, Christine Lagarde said that she did not open the door to anything. Traders estimate a 20% probability that in the mentioned month the European financial regulator will decide to cut interest rates by a half point.
The president of the European Central Bank also said that this financial regulator still expects the implementation of a soft landing scenario in the space of the eurozone economic system. According to her, the latest data on the economic situation does not indicate that there is currently a movement towards recession.
Christine Lagarde emphasized that inflation has to be at 2% in a timely manner and sustainably. This statement was made in the context of explaining why interest rates should remain restrictive for the moment.
The media reports that the results of the October meeting of officials of the European Central Bank may intensify the discussion about whether this financial regulator will be able to lower its rate to 2% in the first half of next year.
It is worth noting that the state of affairs in the eurozone economic system to a certain degree depends on the situation in the United States. Currently, the market is becoming less dovish about the Federal Reserve, which began easing monetary policy last month. There is also uncertainty surrounding the election of the president of the United States. Against this background, there is offering a bid to the greenback. At the same time, the mentioned circumstances reinforce the euro-bearish argument.
Christine Lagarde admitted that September inflation at 1.7% came as a surprise to the European Central Bank. At the same time, she noted that this result increased her confidence in reaching the 2% target on a sustainable basis. In this context, Christine Lagarde once again stated that the European Central Bank is data-dependent and not datapoint-dependent.
The European financial regulator began easing monetary policy in June. It is worth noting that this was the first such decision in the last five years.
Currently, there is a kind of anxiety in the eurozone about the likelihood of a recession scenario. A sign of these attitudes existing in society is the fact that even after Christine Lagarde made a statement about her assessment of the relevant risk, she was asked a repeated question of similar content. She noted that even if one eurozone country is facing difficulties, this does not mean that the rest of the region is affected in the same way. Probably, in the context of mentioning an unnamed country in a difficult situation, Christine Lagarde was referring to Germany.
