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The intention of the central bankers on the European Central Bank’s (ECB) Governing Council to proceed with another interest rate cut next week, as inflation data proves favorable, is indirectly but clearly reflected in the minutes of their last meeting, released today.
Inflation in the Eurozone fell to 1.8% in September, below the ECB’s 2% target. According to reports by the Athens News Agency, the minutes indicate that central bankers believe they "should be free to respond to all incoming data." They also stressed that the pace of further rate cuts "depends on the evolution of incoming data."
The minutes confirm that during the September meeting, the ECB was determined to continue its very gradual rate-cutting process (monetary policy easing). Consequently, some economists argue that it would be too early for the ECB to have a clear assessment of inflation's trajectory at the October meeting, despite September’s positive data.
According to this reasoning, December was the preferred choice for the next rate cut, as by then the ECB will have revised inflation and growth forecasts at its disposal. However, central bankers like Bank of Greece Governor Yannis Stournaras have already suggested that the ECB could carry out two 0.25% rate cuts by December. In a similar vein, his French counterpart Francois Villeroy de Galhau stated today that a rate cut is "very likely" and "won’t be the last."
Nevertheless, the published minutes show that central bankers are cautious, as the risk of delays in meeting the ECB’s inflation target warrants careful consideration to avoid premature monetary easing. Yannis Stournaras told the Financial Times yesterday that even after a 0.5% cut in the key interest rate to 3%, monetary policy remains restrictive.
Supporting the argument for rate cuts are concerns from central banks, as expressed in the minutes, about the future of economic growth in the Eurozone.
The economic outlook for the Eurozone was described as more concerning, with the projected recovery seen as fragile. Economic activity remained sluggish, and risks to growth were still elevated. These concerns are also reflected in lower growth forecasts for 2024 and 2025 compared to June. It was noted that as inflation approaches the target, real economic activity should play a larger role in shaping the direction of monetary policy.
