Confident about inflation, the ECB continues rate cuts

The European Central Bank decided on Thursday to further lower its key interest rates, reassured by the fall in inflation ;ea at its lowest level for three years in the eurozone, where it is now growth that is considered worrying.

This news of a reduction of 0.25 percentage points is raise the deposit rate, which serves as a benchmark for credit conditions in the economy, to 3.25%.

The disinflation process “is on track”, fuelled by a sluggish economy, the 25 members of the Governing Council, meeting in Ljubljana, the capital of Slovenia, for this annual off-site meeting, said in a statement.

With this second monetary easing in a row, after a similar decision in September, they are reversing the caution displayed a month ago: they had then given the impression of wanting to wait until December to loosen the monetary screw again.

But since then, the evolution of consumer prices has strengthened the supporters of rate cuts: inflation in the eurozone even slowed more than expected in September, to 1.7% over a year, against an initial estimate of 1.8%, Eurostat announced on Thursday.

At the same time, the worrying signals have accumulated for the economy of the Old Continent, encouraging a reduction in rates in order to revive consumption and investment.

– German recession –

Even the defenders of the strictest monetary orthodoxy had shown themselves open in recent weeks to a new loosening.

“Growth is still weaker than in the ECB's revised downward forecast in September, while inflation is returning to target faster” than expected, noted Deutsche Bank analysts.

In September, for the first time in more than three years, inflation fell below the 2% threshold, the target set by the Frankfurt monetary institution.

In addition, core inflation, a closely watched indicator that excludes volatile energy and food prices, fell to 2.7% year-on-year.

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“The evolution of inflation is part of the good news,” commented the head of the German central bank, Joachim Nagel, this month.

On the bad news side, Germany, once the locomotive of European growth, now expects a new recession this year.

The German government has just revised down its growth forecasts, counting on a 0.2% decline in GDP this year in Europe's largest economy, after a contraction of 0.3% in 2023.

In the eurozone, private sector activity contracted in September for the first time in seven months, weighed down by the end of the Olympic Games effect in France.

Thursday's decline will “not be the last one”, the governor of the Bank of France, François Villeroy de Galhau, had anticipated at the beginning of October.

However, the Governing Council did not commit on Thursday to the continuation of monetary easing, which will be based “on economic data”.

– Breath of fresh air –

Most economists expect the ECB to decide on further cuts at its next meetings, until the deposit facility rate is brought back to 2%. Once back at this level, the eurozone's monetary policy would be considered neutral, meaning it would neither slow down nor stimulate the economy.

The ECB raised its rates sharply in the wake of the post-Covid-19 recovery and then the war between Russia and Ukraine, which sent energy prices soaring.

It started to lower them again in June, providing a breath of fresh air to households and businesses, likely to support consumer credit, the currently sluggish real estate market or investments.

The sustainability of the fall in inflation in the eurozone is however “very uncertain”, warns Eric Dor, director of economic studies at the IESEG School of Management.

“It would only take further major geopolitical unrest to trigger a new shock to energy prices, and to industrial goods prices due to supply chain disruptions, for inflation to start rising again,” he emphasizes.

The potential impact of China's latest stimulus package could also boost energy demand and therefore affect prices.

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