La Française: From persistent inflation to potential stagnation

16 oktober 2024

Rente ECB

Christine Lagarde and Governing Council members should be able to reach a consensus regarding an additional 25 basis point (bp) rate cut, taking effect as early as this October, after two successive 25 bp cuts in June and September.

We believe that European Central Bank (ECB) members will not risk maintaining restrictive monetary conditions in light of weak growth forecasts for some of the main eurozone countries.

This is what we expect:

Given the less favourable balance of risks in the eurozone, Governing Council members will cut key interest rates by 25 bps arriving at 3.25% for the deposit facility rate.
President Christine Lagarde will underline that the inflation target is symmetrical.
She will be very confident about the sustainable return of inflation to the 2% target “in time” (i.e., in the second half of 2025 according to the ECB's September forecasts) but more concerned about economic activity in the eurozone and more specifically short-term activity.
President Lagarde will indicate that the ECB can lower its rates despite the high rate of services inflation (which remains around 4%) because the central bank is closely monitoring overall price dynamics and wage developments.
Christine Large will however repeat that interest rates are not on a linear downward trajectory.

In summary, we believe that there will be a rate cut in October: data and business surveys are deteriorating, and price dynamics confirm that inflation is likely to return to its target of 2% as expected. The implications for financial markets should be relatively limited. Indeed, the rate cut in October is widely expected by investors and they have even priced in a 25 bp rate cut in December. Moving forward, attention will be focused on the ECB staff’s growth and inflation projections which will be published in December and could potentially show inflation declining faster than expected in 2025 (compared with September forecasts).