The European Central Bank (ECB) is anticipated to lower interest rates again in response to falling inflation as it nears the 2% target. Following a sharp rate hike phase starting in 2022 to combat rising prices, the ECB implemented its first rate cut in June, dropping the key deposit rate to 3.75%. A further quarter-point reduction is expected at this week’s governing council meeting, which will mark the ECB’s second rate cut since 2019.
HSBC analysts have noted that this rate cut is largely expected by the market and that consensus appears strong among the ECB's council members. The central bank’s confidence in further cuts stems from sustained declines in eurozone inflation, which fell to 2.2% in August, its lowest in over three years. Inflation previously spiked at 10.6% in 2022 due to the economic fallout from Russia’s invasion of Ukraine and supply chain disruptions.
The eurozone’s weakening economic performance, particularly in Germany, has added pressure for more rate cuts to stimulate the economy. Meanwhile, wage growth has slowed, easing concerns about labor costs driving renewed inflation.
As the ECB heads into Thursday’s meeting, rate-setters will have updated inflation and growth forecasts to guide their decision-making. Observers will closely watch ECB President Christine Lagarde’s post-meeting comments for hints about future monetary policy. However, analysts believe the ECB will maintain a data-dependent approach and refrain from making long-term commitments about additional rate cuts.
Despite core inflation remaining at 2.8% in August and services sector inflation rising, the ECB is expected to continue reducing rates later this year, given the eurozone's weakening economic prospects.
