ECB to cut interest rates again – “Communication will likely be a balancing act” • news • onvista

Berlin (Reuters) – The European Central Bank (ECB) is about to cut interest rates for the second time this year.

After the monetary policy turnaround in June, the ECB Council, led by President Christine Lagarde, is likely to take the second step downwards on Thursday: The financial markets firmly believe that they will lower the deposit rate by a quarter of a percentage point – i.e. 25 basis points – to 3.50 percent. Many stock market professionals expect that the waning inflation will pave the way for further monetary easing.

Falling energy prices pushed the inflation rate in the euro zone to its lowest level in over three years in August. The price of goods and services rose by an average of just 2.2 percent compared to the same month last year. This meant that the inflation rate was only just above the ECB's target of two percent. In view of the easing price pressure, the ECB had already seized the opportunity to make its first interest rate cut in June. Since then, the deposit rate, which is the benchmark on the financial market, has been 3.75 percent. I receive money from banks when they park excess money with the central bank.

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The rate for the main refinancing operations is currently still at 4.25 percent. According to Commerzbank economist Marco Wagner, the ECB is likely to lower this rate, previously known as the actual key interest rate, by 60 basis points on Thursday in order to reduce the gap between the two rates and thereby keep volatility on the money market low. This is also the assumption of the experts surveyed by Reuters, who expect a reduction to 3.65 percent.

“Don’t travel on autopilot”

“Communication will be a balancing act because some doves in the Council would like to see another interest rate cut immediately in October due to the economic risks, while other Council members would prefer to proceed with caution,” says Commerzbank expert Wagner. Doves refer to monetary authorities who prefer a looser monetary policy line, while hawks prefer a tighter one. Commerzbank expects three further interest rate cuts in December, March and June. According to Bundesbank chief Joachim Nagel, however, the ECB is “not operating on autopilot”. But in his opinion, the big surge in inflation is understandable.

According to DWS economist Ulrike Kastens, the other forecasts updated by the ECB economists on Thursday should also provide important arguments for a step down on the interest rate path: While the forecasts for inflation trends are likely to remain almost unchanged in her opinion, economic expectations are now coming more to the fore. The weakness of domestic demand and a lack of improvement in sentiment in industry are therefore likely to lead to a downward revision of the projection for gross domestic product: In June, the central bank economists had expected GDP growth of 0.9 percent in the euro zone for the current year. With regard to inflation, the ECB economists had assumed an inflation rate of 2.5 percent for 2024.

“Fighting overall inflation, which is also thanks to cheaper energy prices, should not distract from the challenges that central banks still have to overcome,” warns Michael Heise, chief economist at HQ Trust: Rising service prices, higher wages and significant price increases in domestic production require stamina and behavior in stability policy in the euro area and the USA.

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In the United States, the interest rate turnaround is expected on September 18. There, the Federal Reserve is currently keeping the key monetary policy rate in a range of 5.25 to 5.50 percent. Even if the monetary authorities on both sides of the Atlantic should loosen the monetary policy reins soon, there may not be a price explosion on the stock exchanges and on the bond market, where bonds and partial debentures are traded: “The expected interest rate cuts are unlikely to provide a boost for the financial markets.” “These are already taken into account in the current valuations of stocks and bonds,” explains economist Heise.