As the economic outlook becomes increasingly bleak, there is more confidence in inflation control. Will the European Central Bank start "continuous rate cuts" from October onwards?

Signs of weakening European economy, dissipating inflation concerns, and a significant increase in expectations for ECB rate cuts in October.

On Wednesday, September 25th, Simon Wells, Chief European Economist at HSBC, and his team predicted that at each meeting from October to April 2025, the European Central Bank would cut rates by 25 basis points, until the deposit rate drops from the current 3.5% to 2.25%. At this point, monetary policy should be close to neutral.

Johanna Kyrklund, Chief Investment Officer at Schroders, also believes that the ECB should cut rates at the October meeting due to deteriorating economic prospects. Kyrklund told Bloomberg TV reporters:

"For Europe, the environment remains challenging. Many indicators in Germany are not looking good. Germany used to rely on cheap Russian energy, but now that factor seems to be in bad shape."

However, some policymakers have previously stated that the likelihood of another rate cut in October is slim unless the eurozone economy deteriorates significantly.

Currently, many market participants expect a rate cut by the ECB in December, with a 50% chance of a cut in October. Klaas Knot, a hawkish member of the ECB Governing Council and President of the Dutch Central Bank, expressed satisfaction with market expectations last week.

Weak European Economic Indicators

In September, the Eurozone composite PMI fell to 48.9, below the boom-bust line for the first time since February, indicating economic contraction and increased risks of a significant slowdown in economic activity.

Simon Wells, Chief European Economist at HSBC, and his team pointed out that the preliminary PMI for Europe in September was very poor - although the decline in September PMI was in line with market expectations, the magnitude of the decline suggests that this is not just due to the end of the Olympics.

Therefore, ECB policymakers may relax policy earlier or more quickly by cutting rates multiple times. Even relatively hawkish Latvian policymaker Martin Kazaks recently stated:

"If rates remain too high for too long, it could lead to an unnecessary slowdown in the economy."

ECB Growing Confidence in Maintaining Low Inflation

The ECB expects inflation in the eurozone to remain below target in 2026. Further weakening of demand prospects may increase the likelihood of substantial inflation below target. Therefore, even with weak supply side conditions and a cooling labor market, more policymakers may see rate cuts as a "necessary insurance."

HSBC noted that deflation in commodities and the euro, positive wage and inflation expectations, and the weak economy in the eurozone all support the ECB adopting a more accommodative monetary policy. Even a drop in inflation below 2% in September would not be surprising. Knot stated in a TV interview on Tuesday that the ECB will gradually cut rates in the "near future" and in the first half of next year:

"As we become more and more convinced that the 2% inflation target is achievable, interest rates in Europe will continue to decline. However, I do not believe that rates will return to the extremely low levels before the pandemic, rates will stabilize at a more natural level, around 2%."