ECB cuts again, more to come

The ECB cut the deposit rate by 25bps to 3.25% at yesterday’s meeting, as widely expected, and said that disinflation is well on track, which points to further rate cuts ahead particularly as monetary policy remains restrictive. The euro is little changed against the dollar from this time yesterday morning trading at about $1.0840, albeit it did slip to $1.0810 post the ECB meeting. It has weakened against sterling though, to about £0.83, with the pound also rebounding from its post-UK inflation data lows of under $1.29 against the dollar to trade at around $1.3060, helped by firmer than expected UK retail sales for September released earlier this morning.

In government bond markets, US 10-year yields rose by almost 10bps yesterday with stronger than expected US retail sales contributing to the move up, while equivalent German and UK yields ended marginally higher on the day (though short-dated German yields ending slightly lower on the back of the ECB rate cut).

The statement accompanying  yesterday’s ECB rate cut said that “incoming information on inflation shows that the disinflationary process is well on track”. It also noted that “the inflation outlook is also affected by recent downside surprises in indicators of economic activity”, with Christine Lagarde saying in the post-meeting press conference that weaker economic growth poses a downside risk to inflation. The market is pricing in a series of rate cuts at upcoming meetings – with some chance seen of a 50bps cut in December – taking the deposit rate to around 2% by mid-2025.

In the UK, retail sales volumes rose by 0.3% in September – the consensus had expected a fall of 0.4% – following an unrevised gain of 1% in August. For Q3 (July-September) as a whole sales volumes rose by almost 1.9%, having fallen slightly in the second quarter.

For the day ahead, economic data due include housing starts in the US and construction output in the Euro area, while the ECB publishes its latest Survey of Professional Forecasters.