The ECB accelerates the pace of monetary policy easing

As markets expected, the European Central Bank (ECB) cut the deposit facility rate (DFR) again on 17 October by 0.25% to 3.25%, delivering the first back-to-back monetary policy easing since late 2011. This contradicts the guidance given after the 12 September meeting that pointed to the next policy easing no sooner than December.

However, as explained by President Lagarde in the press conference after the Governing Council meeting, the data over the last few weeks have given central bankers greater confidence that “the disinflationary process is well on track”. Furthermore, the worsening GDP growth outlook and the restrictive lending standards applied by banks are expected to reduce inflationary pressures in the months ahead and further justify a downward recalibration of interest rates.

It should be noted that at 3.25% the ECB policy rate is still restrictive in a context in which the inflation rate is rapidly converging towards the 2% target. This is evident when looking at annualised quarterly changes in the seasonally adjusted HICP, which capture consumer price trends in a timelier manner than annual changes.

In September, the annualised quarterly change in the headline HICP fell to 1.6% from 4.0% last March.¹ The core index, which excludes food and energy prices, rose by 2.4% quarterly annualised, relative to 3.8% six months earlier. Looking at the breakdown of core inflation, the moderation of service prices stands out, falling to 3.2% in September from 5.7% in March, they finally seem to respond to the ECB's restrictive policy. The change in core goods prices has instead been below 1% for some time, in line with the pre-pandemic trend (see Chart 1).

Chart 1. Eurozone HICP core components

Source: ECB, LSEG Data & Analytics, and EFGAM calculations. Data as of 17 October 2024.

The restrictive nature of the ECB's current monetary policy is also evident from banks’ tight lending standards applied to corporate clients and the lack of recovery in corporate credit demand (see Chart 2).²

Chart 2. Eurozone lending standards and loan demand

Source: ECB, LSEG Data & Analytics, and EFGAM calculations. Data as of 17 October 2024.

These constrained financing conditions will continue to limit eurozone GDP growth. According to the ECB, the growth outlook is also subject to downside risks stemming from uncertainty over the recovery in China, the risk of tariffs on exports to the US in the event of a Trump victory in the November elections, and the risk of escalation of tensions in the Middle East. 

All these elements point to a lower inflation profile than the ECB expected in September and support the expectation of further interest rate cuts. Although the ECB did not pre-commit to any specific rate path, we believe that downside risks to growth in a context of easing inflationary pressures could lead to more rate cuts starting in December. Back-to-back rate cuts could continue in early in 2025 until interest rates return to around the neutral level, that the ECB itself estimates around 2%.
 

¹ HICP stands for Harmonised Index of Consumer Prices and is released by Eurostat.
²The ECB Bank Lending Survey reports changes in variables compared to the previous quarter. Therefore, a value of 0 indicates that conditions have not changed and in the case of lending standards applied by banks they maintain the same degree of restriction as in the previous period.