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.
Please find below 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).
This commentary is provided for information purposes only. The opinions expressed by the La Française group are based on current market conditions and are subject to change without notice. These opinions may differ from those of other investment professionals. Published by La Française AM Finance Services, head office located at 128 boulevard Raspail, 75006 Paris, France, a company regulated by the Autorité de Contrôle Prudentiel as an investment services provider, no. 18673 X, a subsidiary of La Française. Crédit Mutuel Asset Management: 4, rue Gaillon 75002 Paris is an asset management company approved by the Autorité des marchés financiers under n° GP 97 138. Public Limited Company (Société Anonyme) with share capital of €3,871,680, RCS Paris n° 388 555 021, Crédit Mutuel Asset Management is a subsidiary of Groupe La Française, the asset management holding company of Crédit Mutuel Alliance Fédérale.