European Central Bank set for first back-to-back interest rate cut in 13 years

Economists predicted a continuation of back-to-back ECB rate cuts in notes over the last week, as some raised the possibility that the central bank could soon face the danger of too-low inflation.

Jack Allen-Reynolds, Capital Economics’ deputy chief euro zone economist, foresees a 25 basis point rate cut on Thursday and at each coming meeting until the deposit rate hits 2.5%, from the current 3.5%.

Market consensus is for a rate of 2% by the end of 2025, according to Dutch bank Rabobank, with market pricing at around 1.88%.

Economists at Goldman Sachs forecast an even swifter course of rate cuts, with sequential trims taking the deposit facility to 2% by June 2025. Bank of America Global Research meanwhile sees a continuation from there to a rate of 1.5% by the end of the year.

That aggressive course of monetary easing would come as some argue the ECB is now facing the additional challenge of ensuring inflation does not fall back to the persistent lows seen before the pandemic, which caused it to hold rates in negative territory for years.

French Central Bank Chief Francois Villeroy de Galhau told Italy’s La Repubblica newspaper earlier this month that undershooting the 2% inflation target was a risk the ECB was monitoring.

— Jenni Reid

The euro traded 0.1% lower at $1.0852 on Thursday morning, as investors looked ahead to the next monetary policy decision from the European Central Bank.

The ECB is widely expected to deliver a quarter-point interest rate cut for the second consecutive meeting later in the day.

The ECB will stick to gradual rate cuts through the first half of next year, given geopolitical risks, Mojmir Mrak, professor at Ljubljana University’s School of Economics and Business told CNBC’s “Squawk Box Europe” on Thursday.

“If you compare what happened immediately after last meeting and today, the expectations were that [rates] would go down slower,” Mrak said.

“Now I think we are on the path that interest rates will go down, that’s my view. I think the central bank will do this gradually because we should not forget that we are living in an extremely unstable world. If something larger happens in the Middle East with the oil prices, we can have immediately a change.”

A gradual pace could still see 25-basis-point cuts in October and December, with further small reductions taking place throughout the first half of next year, Mrak noted.

— Jenni Reid

European stock markets were mixed at Thursday’s open, with the benchmark Stoxx 600 index eking out a 0.13% gain at 8:12 a.m. in London. Banks were the best-performing sector, up 0.75%.

Germany’s DAX and France’s CAC 40 were both higher by around 0.5%, pulling ahead of the U.K.’s FTSE 100, which remained near the flatline.

Movements in the euro were muted, with the currency down 0.09% against the U.S. dollar and fractionally higher against the British pound.

— Jenni Reid

The euro is being shielded from sharper losses against the U.S. dollar — despite more robust economic growth in the U.S. — in part because the European Central Bank is not giving strong guidance on its future path, Goldman Sachs’ Chief Europe Economist Jari Stehn told CNBC’s “Squawk Box Europe” on Thursday.

“The ECB is cutting, but is cutting in a very data-dependent fashion, without giving you an awful lot of guidance about where you’re headed next. And we think that’s very much going to be the message also today,” Stehn said.

“So we’ll get the 25-basis-point cut, we think they will say we’re doing this in response to weaker data.”

“I think [ECB President Lagarde] will say, Look, if inflation continues to fall we can cut more, but the extent, the rhythm, all of that will depend on the data. So now I do think markets understand this message quite well.”

The euro has been choppy against the greenback throughout this year, starting out at $1.1044 and falling to $1.0853 as of Thursday.

Stehn also told CNBC that caution around prospects for the euro zone economy was warranted.

“The incoming data has been weak, we obviously have various challenges, from trade to fiscal to the manufacturing sector. We have cut our forecast a couple of times through the summer, we basically have growth of 1% over the next year, which is below what the ECB has,” he said.

“Now, that said we still think we’re growing. So we’re not saying we’re going into recession, we’re not saying we’re totally stagnating.”

— Jenni Reid

Financial markets have fully priced in two more 25-basis-point interest rate cuts from the ECB this year, expected to take place on Thursday and at the central bank’s next monetary policy meeting in December.

That would take the deposit facility — the ECB’s key rate — from 4% in June to 3% by the end of 2024.

The ECB was one of the first major central banks to cut rates when it lowered by a quarter-percentage-point in June. The U.S. Federal Reserve did not join it on the path of monetary easing until September, when it cut its own key rate by a half-percentage point.

— Jenni Reid