17 October 2024
European Central Bank (ECB)
- European Central Bank (ECB) cut rates consecutively after just 5 weeks, delivering another 25bps rate cut on its deposit facility, marginal lending facility and main refinancing operations to 3.25%, 3.65% and 3.40% respectively. Markets were not entirely surprised by the move given the muted reaction seen in government (Germany, France) bond yields. The 55bps decline in EUR against USD to an intraday low of 1.0815 was rather driven by strong US retail sales data.
- ECB statement sees disinflationary process well on-track to target next year although temporary upticks in the coming months is expected as some wage pressure is still keeping domestic inflation elevated. Nevertheless, the inflation outlook is tilted towards downside surprises as suggested in recent indicators. As usual, the statement repeats “datadependent and meeting-by-meeting approach” on future rate decisions.
- Lagarde’s speech reiterated the guidance in the ECB statement, justifying the council’s move on policy rates away from being currently restrictive in light of the incoming data that suggests weaker than expected economic activity. However, they foresee no recession ahead and aims for a soft landing.
Opus View
- Smaller clips of consecutive cuts. With Lagarde stating that today’s decision was unanimous and that only 25bps cut was discussed, we think that the likelihood of a larger 50bps move throughout this cycle is unlikely for now as cuts are being front-loaded preemptively at smaller clips. Hence, another 25bps cut in the Dec’24 meeting is likely and probably more consecutive cuts in 1H25 towards the neutral rate of 2% implied by market pricing. Notwithstanding any surprisingly larger cuts in US Fed fund rates, the weaker growth outlook and clearer downward rate path in the Eurozone could pose further downside risk to the EUR.
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