On September 30th, the official strong indication from the European Central Bank of a potential rate cut in October has finally arrived, as reported by Caixin on. (Edited by Shi Zhengcheng).

On Monday local time, Christine Lagarde, President of the European Central Bank, appeared at the new European Parliament, attending the Economic and Monetary Affairs Committee hearing. During her speech, Lagarde explicitly stated that policymakers in the euro area are becoming "more optimistic" about controlling inflation, and bluntly stated that this sentiment will be reflected in the next monetary policy meeting.

A key statement from Lagarde's testimony, the head of the ECB said: Euro area inflation data is expected to temporarily rise in the fourth quarter, as earlier declines in energy prices will no longer be included in the annual data. But the latest developments have strengthened our confidence in inflation returning to target in a timely manner. We will consider this at the next monetary policy meeting in October.

(ECB's published testimony)

In September, European Central Bank staff predicted that the overall inflation rate for this year would be 2.5%, dropping to 2.2% in 2025, and further declining to 1.9% by 2026.

In response to Lagarde's hints, the bond market's expectation of a 25 basis point rate cut by the European Central Bank in October slightly increased to 85%.

"Economic headwinds" on the table.

Lagarde's mention of the 'latest developments' is precisely the widespread discussion in recent weeks of disappointing economic data across the euro area.

Last week, not only did economic data soften in Spain and France, but the euro area's PMI survey data also unexpectedly fell below the boom-bust line. Clear evidence this week from inflation data in Italy and Germany also shows a substantial softening trend. Data from multiple countries indicate that the eurozone inflation rate for September, to be released on Tuesday, may fall below the 2% policy target for the first time since mid-2021.

So, from the implied rate cut probability in the bond markets to economists revising their forecasts overnight, all point towards the European Central Bank cutting rates at the meeting on October 17.

According to the Caixin report earlier on Monday, economists from renowned institutions such as Goldman Sachs, JPMorgan, BNP Paribas, and PricewaterhouseCoopers have revised their forecasts in the past few days, believing that the European Central Bank will cut interest rates by 25 basis points in October. However, meetings in December and beyond are still affected by a series of uncertainties, especially the results of the US election in early November.

While emphasizing the risks to economic growth, Lagarde also tried to convey some long-term growth confidence. She stated that some indicators show that the economic recovery faces headwinds, but with the expectation of increased actual income for residents, household consumption will rise, and the recovery will gradually strengthen. The ECB's latest forecast is for 0.8% economic growth in the euro area in 2024, with growth accelerating to 1.3% and 1.5% in the following two years. At the same time, the unemployment rate will remain at its current low level.

The European Central Bank executed the second key deposit rate cut of this round of interest rate cuts in early September this year. Following that, a series of officials stated the need to wait for more comprehensive economic data before taking action. However, with the deterioration of growth prospects, the market widely believes that the comments made two weeks ago are already outdated.

Editor/ping