By Balazs Koranyi
FRANKFURT (Reuters) – Several European Central Bank policymakers argued their case on Wednesday for another interest rate cut next week, even if some of their colleagues remained unconvinced as turmoil in the Middle East fuels volatility in energy costs.
The ECB has already lowered rates twice this year and a cut to the 3.5% deposit rate on Oct. 17 is almost fully priced in by financial markets, indicating investors expect the bank to accelerate the pace of policy easing given a weak economy and an unexpectedly quick slowdown in price growth.
“A cut is very likely and it will not be the last one, the rhythm depending on how the fight against inflation evolves,” French central bank chief Francois Villeroy de Galhau told franceinfo radio station.
That message is fully in line with expectations as more than 90% of economists polled by Reuters anticipate a cut next week with a similar majority betting on a follow up move in December.
“Even if we have one cut of 25 basis points now and another one in December, we will be back to just 3% — still in highly restrictive territory,” Greek central bank chief Yannis Stournaras told the Financial Times in his support for back-to-back moves.
Finland’s Olli Rehn, Latvia’s Martins Kazaks and Portugal’s Mario Centeno have all made the case for an October cut while ECB chief Christine Lagarde offered a strong hint about the move, bolstering market bets.
The issue is that the economy has been stagnating for most of the past year, the labour market is softening, wage growth is slowing and inflation had fallen quicker than the ECB predicted.
However, Belgium’s Pierre Wunsch was still undecided, arguing that there were opposing forces at play as growth is weak but domestic inflation is still too quick and geopolitical tensions have pushed energy costs higher.
“Is there a decisive factor that means we have to open the discussion in October? I’d really like to see the central bank staff’s analysis,” Wunsch told Belgian newspaper l’Echo.
Financial investors now see the ECB’s deposit rate falling to 3% by the end of the year and 2% by the end of 2025, hitting what a large part of the financial community consider the neutral rate, a level that neither stimulates, nor slows economic growth.
