The European Central Bank has cut interest rates by 25 basis points again today, the first time it has wielded the knife in two consecutive months for 13 years.
The main deposit rate was lowered to 3.25% from 3.5% in response to weak economic growth and falling inflation, while the main ECB refinancing rate fell to 3.4% from 3.65%.
Today’s decision was “fully expected by investors”, said Daniele Antonucci, chief investment officer at Quintet Private Bank, given “the economic outlook has turned out slightly weaker than expected, while inflation is at target”.
Euro area inflation was 1.7% in September, down from 2.2% in August, bringing inflation below the bank’s 2% target for the first time since June 2021.
“The recovery in Europe is losing steam, with Germany likely facing a mild recession and prospects of restrictive budgets in France and the UK adding to downside risks,” Antonucci continued.
The ECB is likely to change tack going forward and focus on economic growth rather than prices, said Isaac Stell, investment manager at Wealth Club.
“The lacklustre growth in the euro area, which expanded by just 0.2% in the three months to June 2024, highlights the need for a turnaround in fortunes. With Germany currently on the ropes, having seen its GDP contract by 0.1% during the same period, the ECB have swung from the hip, to help stave off any further economic blows.”
Lindsay James, investment strategist at Quilter Investors agreed that the European economy is “in desperate need of stimulus”.
“The ECB will be hoping this third rate cut will begin to make a difference. Today’s news will, at the very least, bring some relief to consumers and businesses which could boost confidence and subsequently help towards the economic recovery,” she said.
David Zahn, head of European fixed income at Franklin Templeton, predicted that the ECB would “continue their rate cutting cycle to below 2% by mid-2025”.
“Looking ahead to December, the ECB is expected to cut rates again by 25bps to continue to address slow economic growth and below-target inflation,” he said.
In terms of how investors should interpret the ECB’s second cut in five weeks, Laura Cooper, global investment strategist at Nuveen, said “a defensive investment stance is prudent”.
“French political frictions [are] playing out in wider spreads and German weakness [is] becoming more entrenched,” she observed. Nuveen sees value in German bunds and is investing selectively in periphery exposures for their attractive carry, such as Italian BTPs (government bonds linked to Italian inflation).