ECB Cuts Rates for Third Time in 2023, More Likely by Year-End
On October 17th, the European Central Bank (ECB) announced another reduction of 25 basis points in the three key interest rates of the Eurozone. Specifically, the deposit facility rate was lowered to 3.25%, the main refinancing operations rate was reduced to 3.4%, and the marginal lending rate was cut to 3.65%. The new rates will take effect on October 23rd.
This marks the third interest rate cut by the ECB this year, with the previous two occurring in June and September. Between July 2022 and September 2023, the ECB had raised interest rates consecutively for 10 times, with a cumulative increase of 450 basis points.
After the interest rate cut in September, the market had anticipated another rate cut for the Eurozone in December of this year. However, due to the recent unexpected decline in inflation in the region, the ECB has acted ahead of schedule.
"The latest information indicates that efforts to combat inflation are progressing well. The inflation outlook is also affected by the recent unexpected downward trend in economic activity indicators," the ECB stated in its interest rate decision announcement on Thursday.
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Data released earlier this month showed that in September, the Consumer Price Index (CPI) in the Eurozone increased by 1.8% year-on-year, slowing down by 0.4 percentage points compared to August, marking the first time since July 2021 that it fell below the ECB's 2% inflation target. On Thursday, just a few hours before this rate cut, Eurostat revised the Eurozone's September inflation rate down from 1.8% to 1.7%.
Among the major countries in the Eurozone, Germany's CPI increased by 1.6% year-on-year in September, a decrease of 0.3 percentage points compared to August, reaching the lowest level since March 2021; France's CPI rose by 1.2% compared to the same period last year, slowing down by 0.6 percentage points compared to August, setting a new low since August 2021.
On September 30th, ECB President Christine Lagarde stated during her appearance at a European Parliament hearing: "The latest developments in consumer prices have strengthened our confidence that inflation will reach the expected target value in a timely manner, and we will take this into account at our next monetary policy meeting in October."
Paul Hollingsworth, Chief Economist for Europe at BNP Paribas, pointed out that the ECB's focus has shifted from fighting inflation to promoting growth. From a risk management perspective, accelerating the pace of easing is entirely reasonable.
As emphasized in previous monetary policy meeting statements, the ECB also refused to pre-commit to a specific future interest rate path on Thursday. Most economists expect that with signs of weak economic growth and controlled inflation becoming increasingly apparent, the ECB will cut interest rates again in December.
"In our view, this is unlikely to be the last interest rate cut by the ECB this year, and we expect another cut in December," said Dean Turner, Chief Economist at UBS Global Wealth Management. "After that, until June next year, it is expected that there may be rate cuts at every policy meeting, with the deposit rate reaching 2% before the ECB presses the pause button."However, some economists oppose the European Central Bank's continuous interest rate cuts. Ulrike Karstens, the Chief Economist for Europe at Deutsche Bank Asset Management, believes that given the ongoing political and economic uncertainties, it is premature to declare victory over inflation.
Joerg Kramer, the Chief Economist at Commerzbank, shares a similar view and even suggests that the European Central Bank might be forced to raise interest rates again after a rapid cut. Kramer points out that contrary to the European Central Bank's claims, wage growth has not slowed down. Continuously lowering interest rates in this situation will stimulate investment demand in businesses in the medium term and exacerbate labor market shortages. This could once again increase employees' bargaining power, leading to higher inflation.
Recently, in collective wage negotiations represented by Germany's largest trade union, IG Metall, the union has demanded a 7% pay increase from employers over the next year. This increase is significantly higher than the current inflation rate in the Eurozone.
Boosted by the European Central Bank's interest rate cut, the three major European stock indices all rose on the 17th. As of 21:27 Beijing time, the UK's FTSE 100 index increased by 0.6%, France's CAC 40 index increased by 1.7%, and Germany's DAX index increased by 1.1%.
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