ECB Prepares for Swift Rate Cuts as Inflation Nears Target Amid Weak Economic Growth

The European Central Bank (ECB) is gearing up for a series of swift interest rate cuts, with inflation easing more rapidly than anticipated and economic growth remaining sluggish.

Fresh surveys and statements from policymakers have reinforced the likelihood of rate reductions in the months ahead as inflation edges closer to the ECB’s 2% target.

On Thursday, the ECB reduced interest rates for the third time this year, citing moderating price pressures. Investors now anticipate rate cuts at the next four or five ECB meetings, with inflation nearing the central bank's target and the eurozone economy flirting with a potential recession. Sources familiar with the ECB’s internal discussions revealed that inflation could reach the 2% mark sooner than previously expected, spurring some policymakers to argue for abandoning the central bank's pledge to maintain tight monetary policy. This move signals that further rate cuts may be imminent.

Estonian central bank Governor Madis Müller echoed this sentiment in a blog post on Friday, noting that the economic outlook had shifted significantly since the ECB’s last projections in September. "Economic growth will be more modest than could have been expected just a month or two ago, and this will probably also reduce the pressure for price increases," Müller stated.

The ECB’s own Survey of Professional Forecasters supported this view, showing inflation returning to the 2% target much faster than previously projected by ECB staff. The survey forecasted price growth at 1.9% in 2025, below the 2% forecasted three months earlier and significantly lower than the ECB’s earlier projection of 2.3% for the year. The ECB itself doesn’t foresee inflation reaching 2% until the final quarter of 2025, but the survey suggests that this goal could be achieved sooner, particularly as underlying price growth is also expected to slow.

A number of economists have revised their forecasts as inflation dropped to 1.7% last month, the lowest rate in over three years. Weak energy prices and slow economic growth are contributing to expectations of subdued price pressures in the coming months. "We see inflation heading back up to 1.9% in October and crossing 2% again in December," HSBC noted in a recent report. "It should then hover between 1.6% and 1.8% for most of the first half of 2025."

Clear Direction on Rates

Part of the reason both policymakers and financial markets expect rapid rate cuts is the continued weakness in economic growth. A separate ECB survey of major firms revealed a further slowdown in business momentum, although companies still expect some modest growth, driven primarily by the services sector offsetting a downturn in manufacturing.

The pessimistic sentiment among the 95 large non-financial firms surveyed stemmed from growing concerns about competitiveness, uncertainties surrounding the green transition, high costs, and political developments. "This was causing businesses to scale back investment and focus on cost cutting, which also weighed on consumer confidence," the ECB reported, based on its survey conducted in late September.

These factors contribute to the expectation of further moderation in price growth, potentially strengthening the case for quicker rate cuts. After battling the worst bout of inflation in over a generation for the past three years, some ECB policymakers now see a realistic risk of undershooting the 2% inflation target.

"The (policy) direction is to my eyes clear – we should continue to cut our restrictive monetary policy in an appropriate way," stated François Villeroy de Galhau, head of the French central bank, on Friday. "But the pace must be guided by agile pragmatism."

By fLEXI tEAM