ECB cuts interest rates frequently
On October 17th local time, the European Central Bank (ECB) decided to lower its three key interest rates by 25 basis points. Specifically, the deposit facility rate was reduced to 3.25%, the main refinancing rate to 3.40%, and the marginal lending rate to 3.65%. These new interest rate policies will take effect on October 23rd. This marks the third rate cut by the ECB since June of this year and is largely in line with expectations. Market analysts generally believe that the ECB is likely to further reduce interest rates in December of this year, with an expected cut of 25 basis points, and multiple rate cuts are anticipated by next June, accumulating to a total of 122 basis points.
In its statement on the rate cut, the ECB emphasized that it is ready to adjust all its instruments at any time and does not commit to a specific interest rate path in advance. Instead, it follows a data-based, meeting-by-meeting decision-making approach. The implication is that as long as necessary, the ECB will maintain sufficiently low interest rates. Overall, the ECB is attempting to support economic recovery and control inflation by swiftly adjusting monetary policy, which will be a critical moment for investors in the eurozone and globally.
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The ECB's frequent rate cuts are fundamentally considered and will have significant impacts.
Firstly, inflation has receded to the 2% medium-term target level, but there are still hidden concerns. The latest data released by Eurostat shows that the Consumer Price Index (CPI) in the eurozone increased by 1.7% year-on-year in September, lower than the initially estimated 1.8%. With the decline in energy and food prices, the overall inflation level in the eurozone has noticeably decreased, and inflation is "firmly on the right track," strengthening the ECB's confidence in implementing more accommodative monetary policies. As ECB President Christine Lagarde stated, although the economy faces challenges, the easing of inflationary pressures makes further rate cuts possible. However, she also acknowledged that due to the continued rapid growth in wages, the eurozone's inflation rate could fluctuate and may fall below the target level next year.
Secondly, adjusting monetary policy and stimulating the economy is the fundamental starting point. The ECB has paid a considerable price to tame the most severe inflation in recent decades. Currently, the eurozone economy remains weak, especially with Germany, the "engine" of the European economy, already in recession for the second consecutive year, dragging down the entire eurozone's economic recovery process and affecting consumer confidence. It is expected that in the third quarter, the eurozone's economic growth will slow down to 0.2%. The continuous contraction of Germany's manufacturing and exports reflects the ongoing severe global market downturn. In addition, private sector economic activity is also very weak, the labor market lacks flexibility, and regional disparities have increased. ECB officials warn that due to increasing economic risks, decisive and effective measures must be taken to stimulate economic growth.
Thirdly, achieving the goal of stimulating economic growth. On one hand, rate cuts usually have a positive impact on financial markets. Lowering interest rates helps reduce corporate financing costs, thereby stimulating investment and expansion. The market generally expects that rate cuts will push up the stock market, as lower interest rates typically enhance corporate profit expectations and investors' risk appetite; the attractiveness of existing high-interest bonds will increase, boosting the financing capacity of governments and businesses. Investors may flock to these assets to achieve better returns. On the other hand, rate cuts are conducive to stimulating consumption. For consumers, rate cuts will directly affect loan interest rates, especially mortgage and consumer loans. The reduction in borrowing costs will increase household spending, thereby promoting market prosperity and economic recovery. The ECB hopes that rate cuts will drive consumption and economic growth, with the eurozone's economic growth rate expected to rise from 0.8% this year to 1.3% next year. However, market analysts believe this forecast may be overly optimistic.
Lastly, a weaker euro is a double-edged sword. As currency markets anticipate that the ECB will conduct three more rate cuts by March 2025, the euro may face long-term downward pressure. Given the current situation, the likelihood of the ECB continuing to cut rates is high, and the market is reinforcing this expectation. Generally, lower interest rates reduce the attractiveness of a currency to investors because they lower the returns on assets denominated in that currency. Therefore, as the euro weakens, investors will seek higher returns elsewhere, leading to capital outflows from the eurozone. From the market reaction, investors will reassess their investment portfolios while considering hedging strategies. A devalued euro means a lower return on investment in Europe, especially relative to dollar-denominated assets.
However, industries such as eurozone manufacturing and exports will benefit from a more competitive exchange rate. Especially in export-intensive industries, a weaker euro gives European goods a competitive edge in the global market. As these industries' products become more attractive in the international market, they are likely to achieve growth and provide more job opportunities.At the same time, the Eurozone also needs to guard against the significant risks that low interest rates may bring. For instance, prolonged low interest rates could lead to asset bubbles and financial market instability, with particular attention needed to guard against the impact of a potential burst in the real estate market bubble. Should the European Central Bank's continued rate cuts fail to effectively stimulate economic growth, the Eurozone would fall into a stagflationary dilemma, thereby forcing the central bank to adopt more aggressive monetary policies.
It is evident that the European Central Bank's decision on whether to continue lowering interest rates in the future requires a comprehensive consideration of multiple factors, including regional and global economic growth, inflationary pressures, and financial market stability. For investors, the performance of Eurozone economic data in the coming months will be a key focus, while the market's attention will be centered on the direction of the Federal Reserve's monetary policy and its impact on global markets.
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