September 2024: The 2nd ECB Interest Rate Cuts

For the second time in 2024 the ECB (European Central Bank) has cut interest rates by a ¼ of 1% (25 basis points) as inflation recedes towards their target of 2%. The key deposit rate was cut, as expected by most financial experts, to 3.5% despite the recovery facing some economic headwinds. Additionally, the refinancing rate (or minimum bid rate, is the interest rate which banks have to pay when borrowing money from the ECB) was cut by a full 60 basis points to 3.65%, a technical adjustment which had been on the cards for quite a while. 

The ECB President Christine Lagarde, like her peers in the United Kingdom and the United States, was quoted as saying “we shall remain data-dependent” and going on to add that the decision to cut interest rates was totally unanimous. The President was further quoted as saying “A declining path is not predetermined, neither in terms of sequence, nor in terms of volume”. A number of analysts surmised that this is financial speak for ‘We may or may not be doing another rate cut this year and we are therefore not going to commit ourselves.’ Financial markets slightly eased back on bets on further monetary easing predicting a total, predicting a circa 36 basis points increase by the end of Q4, though there is no complete consensus.  

The interest rate announcement by the ECB follows a fall in inflation in August to 2.2% with data released showing wage increases which drive price increases in the service sector are now on the decline. A comprehensive measure of workers’ pay, the “Compensation Per Employee”, provided data showing an easing to 4.3% in Q2 from 4.8% in Q1. The ECB President stressed that their inflation target of 2% should be reached by the end of Q4 2025. However, as in a number of other economies, service inflation is still on the radar as being one of the main concerns. 

Despite the sluggish growth in the euro zone’s 20- nation economy, where declining momentum from earlier in the year (households are not supporting the rebound in Q1 and figures for manufacturers remain indifferent), many analysts suggest that there is a predictable outlook to interest rate cuts. Whilst many analysts see an interest rate cut in each of the upcoming quarters until end of Q4 2025, there are some doubts due to the weak economy, which is the justification for the ECB remaining on the fence regarding the timing of future rate cuts.