17 October 2024 07h00

Less inflation and less economy lead ECB to accelerate interest rate cut. Lagarde cuts rates today and again in December

It's a kind of early Christmas surprise for anyone with bank loans indexed to Euribor rates, especially mortgage loans.

In September, and as usual, after the monetary policy meeting in which the European Central Bank (ECB) cut its benchmark interest rate by 0.25 percentage points, Christine Lagarde spoke to journalists to explain the decision and to signal what would happen in the following meetings. Most analysts' interpretations of the ECB leader's words were almost all in the same direction: further interest rate changes would only take place at the last meeting of the year, on December 12th. However, it didn't take long for these interpretations to change radically. And the explanation for the change comes from the signs that have been released in the meantime, both of the slowdown in inflation and the cooling of the eurozone economy.

The first sign came on October 1 when Eurostat, the European Union's statistical agency, released its flash estimate of the Eurozone's inflation rate for September: the rate of price growth fell from 2.2% in August to 1.8%, falling below the ECB's reference value of 2%, something that hadn't happened since June 2021. The positive inflation figures were followed by disappointing economic activity in the eurozone, particularly in its driving force, Germany, to the point where the government has revised its forecasts and now anticipates a further downturn in the economy in 2024.

In this scenario, most analysts now point to two more interest rate cuts by the end of the year, in October and December, both by 0.25 percentage points, after the two already made, also by 0.25 points, which will bring the deposit rate down from 4% to 3%.

"A cut of 25 basis points is expected, and the probability of this is 97%, bringing the ECB's deposit rate down to 3.25%,” said Paulo Monteiro Rosa, senior economist at Banco Carregosa, pointing out that ”four months ago the ECB's deposit rate was 4%, and the eurozone's central bank cut interest rates for the first time in five years on June 6.”

The economist also recalls that at the last ECB meeting "there was more or less a consensus among the members of the eurozone's central bank that interest rates would be maintained at today's meeting, October 17”, but "the rapid deterioration of the single currency's economy, especially Germany's, on its way to a second consecutive year of recession, and the notable slowdown in inflation, especially in German consumer prices, have changed the discourse of the ECB's members (...) paving the way for a fundamental cut in interest rates. ) paving the way for a fundamental 25-point cut tomorrow, in an attempt to recover a rapidly deteriorating economy.”

For the economist, "the ECB's main priority will be to continue balancing inflation, now visibly slowing, with the need to avoid a deeper economic recession, especially in Germany.”

Paulo Rosa also says that "the market anticipates a further cut of 25 basis points at the next and last ECB meeting in 2024, on December 12, with the probability of this cut materializing being 91%, with the ECB deposit rate closing the year at 3%, resulting in a cut of 100 basis points in the current year 2024”.

Economist Filipe Garcia, president of IMF - Informação e Mercados Financeiros, also says that there will be two rate cuts by the end of the year. At today's meeting, "the ECB is expected to cut benchmark interest rates for the third time this cycle. The cut is expected to be 25 basis points, to 3.25% on the deposit rate, which is currently the main benchmark.” According to the economist, the ECB leader will justify the cut with "the evolution of inflation, which has been retreating rapidly, and also with the signs of economic slowdown, maintaining the view that monetary policy will continue to be restrictive”. According to Filipe Garcia, Christine Lagarde should also warn that, due to base effects, "homologous inflation rates could rise in the coming months and that a possible shock in energy prices is a risk to be taken into account”, even so, the economist stresses, "a new cut should be signaled in December”.

Paulo Rosa and Filipe Garcia also agree that the effect of these interest rate cuts by the ECB has already been reflected in the Euribor rates, but that the rates used to index credit should continue to fall.

"Euribor rates have already fully discounted today's 25 basis point cut, as well as another one of the same size at the December 12 meeting,” says Filipe Garcia, concluding that ”Euribor interest rates should continue on a downward trend, but more pronounced in the shorter maturities.”

Paulo Rosa also says that "Euribor rates have already discounted part of this fall, but it is likely that they will continue on a downward path”.