The ECB is preparing for another interest rate cut: tomorrow the Governing Council is expected to announce a new reduction of 25 basis points as widely expected. An intervention that responds to the rapid deterioration of the economic situation in the Eurozone, confirmed by the latest manufacturing PMI data, which paint a clearly recessive picture.
The latest manufacturing data
The latest investigation of Manufacturing SME in the Eurozone reported that the purchasing managers’ confidence index fell again in September 2024, reaching 45 points from the previous 45.8, slightly better than the 44.8 points of the preliminary estimate. However, the indicator of the health of the manufacturing sector remains below the 50 point threshold, which acts as a watershed between recession and expansion.
It is a “strong e accelerated worsening of health of manufacturing companies in the eurozone. In particular, the main index fell to the lowest level of the current year reaching a value lower than the average contraction of the last 27 months“, explains S&P Global which is responsible for the survey on purchasing managers in the Eurozone. The survey also highlighted that eurozone manufacturing output fell at the fastest rate yet in 2024.
Inflation sent towards ECB target
The last one Eurotower monthly bulletin confirmed that, on the price front, the scenario remains that of a “continuous disinflationary trendwhich is proceeding at a rapid pace and more or less in line with what was expected.” The ECB will therefore proceed with a “gradual approach” to adjust rates in line with the pace of ongoing disinflation.
“Based on the updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of the monetary policy transmission – we read in the minutes – it is it is appropriate to take a further step forward to moderate the degree of restrictiveness of monetary policy”. From the minutes it emerges that the bankers have confidence “in a timely return of inflation to target” and that “a phased approach to reducing restrictions will be appropriate if incoming data is in line with the baseline projection.”
Another cut needed
“A rate cut is very likely and will not be the last”the governor of the Banque de France and member of the ECB governing council recently confirmed, Francois Villeroy de Galhauadding that “the subsequent pace” of possible cuts “will simply depend on the evolution of the fight against inflation” which, in his opinion, will remain around 2% in France at the beginning of next year and in Europe during the 2025.
Also another member of the executive committee, Frank Eldersonspoke of a weaker than expected Eurozone economy and suggested the possibility of new interventions. “Several recent indicators – explained the banker – suggest that i downside risks to growth economical are already taking shape. So we will need to carefully consider whether this will have implications for our inflation forecasts.”
What the analysts think
Generali Investment leans towards a rate cut by 25 points by the ECB. “After several disappointing macroeconomic data, members of the Governing Council have become more accommodative in their public comments, thus fueling expectations that monetary policy will become less restrictive again at the next meeting on 17 October,” explains Martin Wolburg, senior economist at Generali Investments , adding “a probable one greater emphasis on growth risks and fewer concerns about inflation risks should support them expectations of gradual rate cuts in upcoming meetings“.
Pictet WM leans towards one “acceleration” of easing of financing conditions and believes that the ECB can “anticipate convergence towards neutrality (which we believe is around 2%), by making cuts of 25 basis points at each meeting from now until June 2025” for a total of 100 points in the first semester of next year. For Pictet experts there is “the risk that the ECB will be forced to reduce rates even faster than currently expected, even bringing the deposit rate below its neutral level”.
PIMCO agrees that a 25-point rate cut in October is “reasonable” and that “another rate cut in December seems likely”just as the assessment of a terminal rate of around 2% for the second half of next year “remains consistent” with the estimates of the neutral rate for the euro area.
What will happen to those who have a mortgage?
The ECB’s cut, via the Euribor realignmentwill have immediate effects on mortgage repayments. According to calculations by Facile.it, “in the coming months the installment of a variable mortgage standard it would drop by around 18 euros“.
“To date, thanks to the cuts made by the ECB in 2024 – it is underlined – the drop for a standard mortgage has been just over 36 euros, but the good news is that the indices should continue to decrease in the coming months too” and therefore “the installments could drop by around 95 euros by the end of next year“.
