ECB to Implement Faster Rate Cuts to Support the Economy

Investing.com – As eurozone activity indicators have unexpectedly dropped and inflation concerns are easing, HSBC anticipates that the European Central Bank (ECB) will implement interest rate cuts sooner than initially expected to bolster the region’s economy.

Recent data revealed a significant and unexpected contraction in eurozone business activity this month, indicating a widespread downturn. Germany, the largest economy in Europe, experienced a deepening decline, while France, the second largest, fell back into contraction.

The preliminary HCOB index, compiled by S&P Global, decreased to 48.9 this month from 51.0 in August, falling below the pivotal 50 mark that distinguishes growth from contraction for the first time since February.

HSBC analysts noted in a report dated September 25, “The risks of a sharper slowdown in activity have clearly increased.” They suggested that a risk-based approach to monetary policy could lead to earlier and, at least initially, more aggressive easing. With the current deposit rate at 3.50%, there is potential for multiple cuts while maintaining a restrictive policy stance.

Moreover, the bank highlighted disinflationary trends in commodities and the euro, along with favorable movements in wages and inflation expectations, reinforcing the case for imminent easing given the sluggishness of the largest eurozone economies.

In its September projections, the ECB foresaw headline inflation falling below target levels in 2026.

HSBC warned that a further decline in demand could elevate the risk of a significant inflation undershoot. They stated, “Even if supply-side issues persist and the labor market cools gradually, more policymakers may be convinced that some ‘insurance’ rate cuts could be warranted.”

The bank now expects the ECB to reduce rates by 25 basis points at each meeting from October until April 2025, reaching a key deposit rate of 2.25%. Previously, HSBC had anticipated cuts every other meeting until the deposit rate hit 2.50% in September 2025.