ECB cuts rates but cautious on future decisions; 2024 outlook shifts

On Thursday, the ECB decided to cut interest rates. The deposit rate fell by 25 basis points—from 3.75 to 3.50 percent. Experts from mBank emphasized in their Friday report that "the September meeting of the European Central Bank was exceptional in one respect. It saw the long-anticipated narrowing of the interest rate corridor (between the refinancing and deposit rate). This modification aims to improve monetary policy transmission to the real economy." They emphasize that the rate change itself was not a surprise, but they point out the caution of ECB President Christine Lagarde regarding future decisions.

According to the mBank report, the ECB cut rates in line with previous announcements. As a result, the spread between the deposit rate and the refinancing rate will drop to 15 basis points from September 18, while the spread between the refinancing rate and the lending rate will remain at 25 basis points. Analysts highlight a significant change in the ECB's communication, noting that "the ECB observed that wage pressure is systematically decreasing, and corporate profits are absorbing the impact of higher wages on inflation."

The mBank report discusses the latest ECB macroeconomic projection in detail. Analysts write that "it showed stabilization of overall inflation (to be precise, revisions were less than 0.1 percentage points) and a marginal increase in the path for core inflation." Experts emphasize that this is not surprising, considering recent data, especially those concerning service inflation.

Regarding the GDP forecast, mBank points out that "symbolic downward revisions were made each year. Details suggest that the main factor lowering growth compared to the previous projection was private consumption and investment." However, analysts note that "according to Lagarde, the situation in this area should improve based on rising incomes and falling inflation."

The report highlights Christine Lagarde's statements during the press conference. "She noted weaker growth in unit labor costs in the second quarter despite weaker productivity. In other words, the pace of wage growth reduction is progressing quite briskly." Moreover, "Lagarde indicated that the September inflation reading will likely be low (base effects) but will rebound in the last quarter."

Based on ECB decisions and statement analysis, mBank experts present forecasts for future central bank actions. "We believe that in October, there will not be a majority for a rate cut, and such a move will only occur in December." They also add that "the pace of rate cuts next year should, in turn, speed up somewhat."

"By the end of 2025, we expect the deposit rate to be at 2 percent, and the room for it to fall from this level is currently seen as limited," the report authors write. They also point out that "this is significantly higher than before the pandemic, which is related, among other things, to the immense fiscal expenditures that the eurozone/Europe will have to make in the coming years."