ECB poised to cut rates again: what to expect on 17 October

The European Central Bank (ECB) is set to convene on 17 October for its latest monetary policy meeting, with widespread expectations of another interest rate cut. This decision comes amidst a backdrop of falling inflation and growing economic concerns across the eurozone.

​A highly anticipated rate cut

​Most economists are predicting that the ECB will reduce its key interest rate 25bps, bringing it down to 3.25%. This forecast is largely based on recent statements from prominent ECB officials, including President Christine Lagarde and François Villeroy de Galhau, the head of the French central bank.

​The primary catalyst for this expected rate cut is the recent drop in inflation below the ECB's 2% target. September's preliminary inflation rate came in at 1.8%, the lowest level in over three years. This development has bolstered the case for monetary easing.

​The path of future rate cuts

​Market observers are not only focused on the October meeting but are also looking ahead to potential future rate cuts. There is a strong consensus that another cut will follow in December, with money markets currently pricing in reductions of 25 basis points for both October and December.

​Looking further ahead, economists from Deutsche Bank have revised their expectations, now anticipating a faster pace of rate cuts than previously forecast. They project that the ECB will reach its neutral rate (estimated between 2.00-2.50%) by mid-2025, six months earlier than their initial predictions.

​Potential market impacts

​The anticipated rate cuts are expected to have significant implications for various financial markets:

1. ​Equity markets: Typically, stock markets tend to rise on the expectation of rate cuts, as lower borrowing costs can stimulate economic growth and corporate profits.
2. ​Bond markets: Falling interest rates generally lead to lower yields, which in turn pushes bond prices higher. Existing bonds, particularly those issued during periods of higher rates, may become more attractive to investors seeking yield.
3. ​Savings and borrowing: While savers may see lower returns on their bank deposits, borrowers stand to benefit as consumer debt and mortgages become more affordable.

​A note of caution

​Despite the widespread expectation of a rate cut, some economists urge caution. Carsten Brzeski of ING points out that no significant economic data has been published since the ECB's last meeting. He suggests that while a rate cut is likely, a surprise hold is not entirely out of the question.

​What does this mean for EUR/USD? – technical analysis

​Talk of an ECB rate cut has delivered a severe blow to EUR/USD, wiping out most of the gains made since the beginning of August.

​Losses appear to have stalled for now, with some tentative buying of the dip going on above $1.09. Should the ECB prove to be more confident about the outlook for the eurozone economy, or sound more hawkish on the likelihood of more rate cuts, we may see the pair recover.

​For the moment, a close back below $1.09 would negate the possible bullish view.

​EUR/USD chart

Conclusion

​As the 17 October meeting approaches, all eyes will be on the ECB's decision and the subsequent guidance provided by President Lagarde. While a rate cut seems highly probable, the pace and extent of future cuts remain subjects of keen interest for economists, investors, and policymakers alike. The ECB's actions in the coming months will play a crucial role in shaping the eurozone's economic landscape as it navigates through challenging global conditions.