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).
