Markets eye second ECB rate cut on Thursday

ECB president Christine Lagarde has been vague on further reductions and has repeatedly said the Governing Council was not committing to any specific path of interest rate decisions. Picture: AP/Michael Probst

The European Central Bank (ECB) is expected to return to its roadmap of interest rate cuts at its meeting on Thursday.

Money markets have strengthened bets the European regulator will reduced interest rates by a further 0.25% following the first reduction of 0.25% announced in June, especially as the pace of eurozone inflation cooled further to 2.2% last month, hovering just above the ECB’s target of 2%.

European stocks were muted ahead of the policy meeting where the ECB Governing Council will reconvene for the first time since its summer break in August.

The Stoxx Europe 600 Index gained 0.1% in early trading on Tuesday. Real estate and utilities stocks outperformed, while healthcare and auto sectors were the biggest laggards.

After advancing last month, the Stoxx 600 has stumbled again in September as weak economic data rekindled worries about a recession. Sectors linked to the economic cycle — or so-called cyclicals — have underperformed defensive peers since the end of May.

The economic outlook suggests cyclical stocks are facing further declines. Manufacturing PMIs, typically a proxy for the group, are still deeply in contraction territory both in the US and in Europe, with no clear sign of improvement.

Sentiment is likely to be impacted by the upcoming US presidential debate later on Tuesday, the US consumer price report on Wednesday and the ECB’s meeting on Thursday, where the central bank is expected to cut interest rates for a second time this year.

“We expect that volatility remains higher until the US election as investors want to wait for certainty until they make big decisions,” said Ulrich Urbahn, head of multi-asset strategy and research at Berenberg. 

There is also “some surprise potential” based on the ECB’s signals about future rate decisions, he added.

That said, ECB president Christine Lagarde has been vague on further reductions and has repeatedly said the Governing Council was not committing to any specific path of interest rate decisions.

Another rate cut will mark the second reduction to reverse 10 interest rate hikes since July 2022, which were used to drive down stubborn inflation.

Analysts predict the ECB will announce on average one rate cut per quarter in 2025.

Meanwhile, monetary policy changes are set to hit the main retail banks on the domestic market in the Republic following a period of bumper profits hauled in by all three.

Last month, following half-year earnings reports published by the banks, AIB chief executive Colin Hunt predicted the lender’s profitability would ease next year as the ECB embarks on an interest-rate cut roadmap, albeit at a gradual pace.

“The bank will remain very strongly profitable, although we would expect profitability to ease as we move through 2025 and into 2026,” said Mr Hunt.

Elsewhere, the US financial regulator, the Federal Reserve, is scheduled to meet next week.

• With additional reporting by Bloomberg