Weekly Update - The ECB opens the Autumn sales

The ECB opens the Autumn sales. The European Central Bank (ECB) opted for a third rate cut at its October meeting. This decision had been largely prepared over the last few days, against a backdrop of easing in inflation and economic slowdown more marked than expected. The ECB stance remained relatively dovish, even though the ECB did not wish to pre-commit to a future pace of rate cuts. In our view, the economic context should encourage the ECB to continue a fast monetary easing, with a further cut as early as December. 2025 Budgetary plans in the euro area major economies should also push the ECB towards additional rate cuts.
 
The ECB caught up by the fundamentals. Although it had clearly signalled in September its intention to make a pause in its easing cycle, the ECB finally decided to make a third rate cut in October, of 25 basis points, taking the refinancing rate to 3.25%. This U-turn came in the wake of disappointing economic data since the previous ECB meeting. Inflation fell back below the 2% target for the first time in three years, to 1.7% year-over-year in September.
 
Since 2022 (the war in Ukraine), the ECB has faced a fragile economic backdrop, with lingering risks of recession, but it has opted for a restrictive policy to combat the high level of inflation. What is new now is that inflation is low, with core inflation also confirming its downward trend. In a sign of the ECB members' concerns about economic activity, the rate cut was taken unanimously, whereas in mid-September a large majority of these members seemed to prefer a pause in October. In a sign of the ECB members' concerns about economic activity, the rate cut was taken unanimously, whereas in mid-September a large majority of these members seemed to prefer a pause in October
 
The easing cycle should continue unabated. In our view, the economic environment remains conducive to an acceleration in the rate-cutting cycle, with the next cut as early as December. Admittedly, the ECB did not want to pre-commit to a future path of rate cuts, insisting that decisions will be taken on a meeting-bymeeting basis and will be data-dependent –albeit still leaving open the possibility of a fourth rate cut in December. Over the coming months, headline inflation may rebound, as a result of energy price increases, without however calling into question the downward trend in underlying inflation.
 
Furthermore, it seems unlikely that economic data will improve significantly, particularly in the current context of political and geopolitical tensions. The markets are now expecting between 25bp and 50bp of rate cuts in December, and cuts of at least 25bp are fully priced in for the next three meetings (until March). Against this backdrop, the euro continued to lose ground against the dollar, reaching its lowest level since the end of July (a movement also explained by the publication of robust data in the United States).
 
Monetary easing versus fiscal tightening. Beyond the current bout of economic weakness, budgetary plans for 2025 also argue in favour of an acceleration in monetary easing. While the extent of this fiscal consolidation has yet to be determined, legislative debates on the 2025 budgets point to a significant tightening of fiscal policy in France, Italy and Germany. These policies would have a negative impact on economic growth and ultimately on inflation, which should play a role in future ECB’s decisions
 
Other highlights of the week
 
In the highlights of the week, we chose to talk about the inflation in the United-Kingdom as well as Chinese economics situation :

• United Kingdom: inflation data in line with a more accommodating monetary policy. The UK economic data for the UK have been firm, with the unemployment rate dropping one-tenth to 4% and retail sales remaining robust at 4% year-over-year. Meanwhile, statistics closely monitored by the Bank of England were favourably oriented. Headline inflation fell below the BoE's 2% target in September, at 1.7% year-over-year. Services inflation dropped below 5% year-over-year for the first time since 2022. Moreover, wage growth eased further, reaching 3.8% year-over-year in August. These statistics may allow the BoE to set a more accommodating tone for its monetary policy.

• China: GDP growth below target. The Chinese economy continues to display a degree of economic fragility. Growth in Q3 came in at 4.7% year-overyear, slightly below the 5% target set by Beijing. However, given the still very buoyant trade balance figures, the composition of this growth remains primarily export-led, and domestic demand remains muted. The announcements made by the Politburo at the end of September have still not been translated into concrete measures and will in any case take time to be reflected in the economic data.

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