New Delhi

The European Central Bank is likely to cut interest rates again on Thursday, arguing that inflation within the eurozone is now largely tamed and the economy is stagnating.

Advertisment

That would be the first successive reduction in 13 years and emphasise a policy shift for the euro zone's central bank from inflation-fighting to sheltering economic growth, which has lagged well behind that of the United States for two years in a row.

The latest batch of economic data is likely to have sealed the deal within the ECB in favour of a rate cut since business activity, sentiment surveys, and inflation readings for September came in below estimates.

Several of the ECB officials, including the president herself, Christine Lagarde, have signalled the possibility of a fresh cut in borrowing costs, which is likely this month after recent releases, thus leading investors to fully discount the move.

Advertisment

"The trends in the real economy and inflation support the case for lower rates," Holger Schmieding, an economist at Berenberg, said.

A quarter-point cut on Thursday would take the rate that the ECB pays on banks' deposits to 3.25 per cent, while money markets nearly fully price in three further cuts by March 2025.

Lagarde and colleagues are unlikely to provide any explicit clues about what to look forward to on Thursday, repeating their mantra that decisions will be taken "meeting by meeting" responding to incoming data.

Advertisment

But most ECB watchers think the die is cast for cuts at every meeting.

"The implicit signal is likely to be that another cut is very likely in December unless the data improve," Paul Hollingsworth, an economist at BNP-Paribas, said.

Inflation & Growth

The ECB can now rightly claim to have nearly tamed the worst inflation rise in a generation.

Prices grew by just 1.8 per cent last month. While inflation may edge above the ECB's 2 per cent target by the end of this year, it is likely to stay there or slightly lower for the foreseeable future.

But the economy has paid a heavy price for this.

The high interest rates have sucked investment and economic growth, which has battled for nearly two years. The latest statistics, which also include those on industrial output and bank lending, suggest more of the same in the coming months.

The labour market, which has been exceptionally strong, is also starting to look a bit soft with the vacancy rate - or the proportion of vacant jobs as a share of the total - abating from record highs.

This has thrown fuel on the fire of pressure mounting on the ECB to ease policy before it's too late.

"Now we face a new risk: undershooting target inflation, which could stifle economic growth," Portuguese central banker Mario Centeno said recently. "Fewer jobs and reduced investment would add to the sacrifice ratio already endured."

The problem is that some of this weakness stems from structural issues - including energy costs that are too high and low competitiveness hobbling Europe's industrial powerhouse, Germany.

These challenges cannot be overcome with lower interest rates alone, although they can help at the margin by making capital cheaper.

"We cannot ignore the headwinds to growth," ECB board member Isabel Schnabel said. "At the same time, monetary policy cannot resolve structural issues."

This article includes reporting from Reuters.