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Christine Lagarde, president of the European Central Bank (ECB), left, and Wolfgang Proissl, director of general communications at the European Central Bank (ECB), at a rates decision news conference in Frankfurt, Germany, on Thursday, Sept. 12, 2024.
Bloomberg | Bloomberg | Getty Images
The European Central Bank is widely expected to announce its third interest rate cut of the year at its Thursday meeting, after policymakers flagged reduced inflation risks and a weakening growth outlook.
Headline price rises in the euro area eased to 1.8% in September, coming in below the central bank's 2% target for the first time in three years.
A cut on Thursday would see the ECB reducing rates at consecutive meetings for the first time in 13 years.
Expectations for a faster pace of monetary easing have built since the ECB's Sept. 12 meeting, when market pricing suggested just one more rate cut this year, rather than the two priced in as of Thursday morning.
Along with the latest inflation print on Oct. 1, that shift in sentiment has come amid dovish comments from various ECB members. ECB President Christine Lagarde also swayed markets, when she said the latest data readings "strengthen our confidence that inflation will return to target in a timely manner."
Another key factor is the euro zone growth outlook. The ECB trimmed its euro zone growth forecast for 2024 last month on the back of weaker domestic demand, now projecting an 0.8% GDP rise, compared with 0.9% previously. Some of its biggest economies continue to face major challenges, including manufacturing weakness in Germany and a huge fiscal consolidation project looming in France; while sentiment indicators remain weak.
ECB will stick to gradual rate reductions given geopolitical risks, professor says
EU flags flutter in front of European Central Bank (ECB) headquarters in Frankfurt, Germany July 18, 2024.
Jana Rodenbusch | Reuters
The ECB will stick to gradual rate cuts through the first half of next year, given geopolitical risks, Mojmir Mrak, professor at Ljubljana University's School of Economics and Business told CNBC's "Squawk Box Europe" on Thursday.
"If you compare what happened immediately after last meeting and today, the expectations were that [rates] would go down slower," Mrak said.
"Now I think we are on the path that interest rates will go down, that's my view. I think the central bank will do this gradually because we should not forget that we are living in an extremely unstable world. If something larger happens in the Middle East with the oil prices, we can have immediately a change."
A gradual pace could still see 25-basis-point cuts in October and December, with further small reductions taking place throughout the first half of next year, Mrak noted.
— Jenni Reid
European stocks mixed, euro flat ahead of rate announcement
Europe's Stoxx 600
European stock markets were mixed at Thursday's open, with the benchmark Stoxx 600 index eking out a 0.13% gain at 8:12 a.m. in London. Banks were the best-performing sector, up 0.75%.
Germany's DAX and France's CAC 40 were both higher by around 0.5%, pulling ahead of the U.K.'s FTSE 100, which remained near the flatline.
Movements in the euro were muted, with the currency down 0.09% against the U.S. dollar and fractionally higher against the British pound.
— Jenni Reid
Lack of ECB guidance is supporting euro against U.S. dollar, Goldman economist says
The euro is being shielded from sharper losses against the U.S. dollar — despite more robust economic growth in the U.S. — in part because the European Central Bank is not giving strong guidance on its future path, Goldman Sachs' Chief Europe Economist Jari Stehn told CNBC's "Squawk Box Europe" on Thursday.
"The ECB is cutting, but is cutting in a very data-dependent fashion, without giving you an awful lot of guidance about where you're headed next. And we think that's very much going to be the message also today," Stehn said.
"So we'll get the 25-basis-point cut, we think they will say we're doing this in response to weaker data."
"I think [ECB President Lagarde] will say, Look, if inflation continues to fall we can cut more, but the extent, the rhythm, all of that will depend on the data. So now I do think markets understand this message quite well."
The euro has been choppy against the greenback throughout this year, starting out at $1.1044 and falling to $1.0853 as of Thursday.
Stehn also told CNBC that caution around prospects for the euro zone economy was warranted.
"The incoming data has been weak, we obviously have various challenges, from trade to fiscal to the manufacturing sector. We have cut our forecast a couple of times through the summer, we basically have growth of 1% over the next year, which is below what the ECB has," he said.
"Now, that said we still think we're growing. So we're not saying we're going into recession, we're not saying we're totally stagnating."
— Jenni Reid
Markets pricing two more rate cuts by end of the year
Financial markets have fully priced in two more 25-basis-point interest rate cuts from the ECB this year, expected to take place on Thursday and at the central bank's next monetary policy meeting in December.
That would take the deposit facility — the ECB's key rate — from 4% in June to 3% by the end of 2024.
The ECB was one of the first major central banks to cut rates when it lowered by a quarter-percentage-point in June. The U.S. Federal Reserve did not join it on the path of monetary easing until September, when it cut its own key rate by a half-percentage point.
— Jenni Reid
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