Investors Brace for ECB October Rate Cut as Inflation Falls and Euro Weakens

Investors are preparing for a 25-basis-point rate cut by the European Central Bank on October 17, following signs of easing inflation and economic slowdown. ECB President Christine Lagarde's recent comments, coupled with falling inflation data, have bolstered expectations for accelerated rate reductions.

ECB Poised for October Rate Cut as Inflation Drops and Economic Activity Slows Across Eurozone

Investors increasingly anticipate that the European Central Bank will reduce interest rates by an additional 25 basis points on Oct. 17, as there is mounting evidence of a substantial decline in inflation and economic activity.

In addition to October, numerous analysts anticipate that the rate reductions will occur faster than the once-per-quarter pace they had previously predicted. According to the Wall Street Journal, this is expected to result in a decline in the euro and the yields on eurozone government bonds.

“Anything other than an October cut will now be difficult to justify,” said Jussi Hiljanen, chief strategist for euro and dollar rates at SEB Research.

In a statement to the European Parliament on Monday, ECB President Christine Lagarde expressed her increased confidence in the central bank's ability to achieve its inflation target of 2.0%, which fueled expectations for a rate cut. She stated that the central bank would consider this during the October meeting.

Additionally, the provisional estimate for September annual inflation, released on Tuesday, was 1.8%, lower than the target of 2.2% set in August.

“The time for gradualism is over: today’s eurozone inflation release paves the way for another ECB rate cut this month,” Natasha May, global market analyst at J.P.Morgan Asset Management, said in a note.

ECB Expected to Cut Rates at Every Meeting Into 2025 as Euro Faces Pressure from Global Markets

According to LSEG Refinitiv data, eurozone money markets are anticipating 51 basis points of ECB rate decreases for the final two meetings of 2024, with a 25-basis-point reduction in October.

Hiljanen of SEB anticipates that the European Central Bank will discontinue its policy of data dependency for future decisions.

From this point forward, SEB anticipates that the central bank will reduce interest rates at each meeting, resulting in a deposit rate of 2.00% by June 2025, down from the current 3.50%.

Morgan Stanley anticipates that the deposit rate will decrease by 25 basis points on consecutive occasions from October to March 2025, followed by a more gradual quarterly pace that would result in a deposit rate of 1.75% by the end of the year.

Morgan Stanley analysts stated in a note that the yield on 10-year German government bonds, or Bunds, will shortly decrease to 2% from the current 2.050%, and it could reach the 1.8%-1.9% range by the end of the year.

“The current market assessment on European macro calls for a sub-2% 10-year Bund [yield] being reached in 2025, with a potential consolidation around the 1.60% area by the first quarter of 2025,” they said.

The euro may also experience a decline.

Michael Brown, a research strategist at Pepperstone, anticipates that the euro will experience a decline in value, particularly in the Norwegian krone, the Australian dollar, and the sterling, due to accelerated rate cuts. This is due to the probability of slower and more incremental rate cuts from the respective central banks.

Lagarde's comments were in stark contrast to those of U.S. Federal Reserve Chair Jerome Powell, who stated on Monday that the Fed was not in a rush to reduce interest rates rapidly following its significant 50 basis-point reduction last month.

In a note, Monex Europe forex analysts emphasized this significance for the euro's fortunes about the dollar.

“As we see it Lagarde gave the clearest steer yet towards the idea that the ECB is about to step up their easing cadence, suggesting that inflation pressures were easing faster than had been expected,” they said.