In a unanimous decision and as markets had expected, European Central Bank (ECB) members cut their key interest rates by 25 basis points effective October 23:
- The deposit rate is now down to 3.25%
- The main refinancing rate will dip to 3.40%
- The marginal lending facility rate will ease to 3.65%
Link to ECB October Monetary Policy Statement
In its statement, the ECB cited its “updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission” as the reason for the latest cuts.
Specifically, members shared that “recent downside surprises” in economic indicators have affected their inflation outlook. Despite that, they generally believe that the disinflationary process is “well on track” even as they expect inflation to “rise in the coming months” before falling to target in the next year.
The statement also emphasized the Governing Council is not pre-committing to a particular rate path, saying that it will adopt a “data-dependent and meeting-by-meeting approach.”
In her presser, President Lagarde recognized that economic growth risks are “tilted to the downside,” enough to affect the bank’s inflation outlook. She also repeated the bank’s preference for a meeting-by-meeting approach.
Still, she left room for further adjustments, saying “If the data continues to point in the same direction, we will act accordingly, but we remain flexible and open.”
Link to ECB October Monetary Policy Press Conference
Market Reactions
Euro vs. Major Currencies: 5-min
Overlay of EUR vs. Major Currencies Chart by TradingView
The euro, which ranged against USD, JPY, and CAD but dipped against its other counterparts in the hours leading up to the release, barely reacted to the anticipated ECB rate cut.
However, EUR saw sharp downswings across the board when Lagarde admitted in her presser that economic risks are “tilted to the downside” and left room for further easing.
The euro made new daily lows before catalysts and themes during the U.S. session allowed the common currency to pull back against the safe havens and steady against “risk” currencies like AUD, NZD, CAD, and GBP.