Due to the well-controlled inflation levels in the Eurozone, the European Central Bank (ECB) has cut interest rates for the third time this year. Analysts have pointed out that the deceleration of inflation in the Eurozone may be faster than expected, while the economic growth outlook is not optimistic. The rapid interest rate cuts by the ECB have gained more support, but there is still a need to be vigilant against the risks of upward inflation pressure brought about by factors such as a rebound in energy prices.

Inflation Pressure Accelerates Deceleration

Following rate cuts in June and September, the ECB recently lowered its three key interest rates by 25 basis points, with the deposit facility rate, the main refinancing rate, and the marginal lending rate being reduced to 3.25%, 3.40%, and 3.65% respectively, effective from the 23rd. This marks the second consecutive interest rate cut across two monetary policy meetings.

ECB President Christine Lagarde stated that the latest information on inflation indicates that the process of controlling inflation is progressing smoothly. While the battle against inflation has not yet achieved a "complete victory," the decrease in price pressure is a positive sign. Inflation is expected to rise in the coming months before falling to the target level next year.

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Lagarde said that the ECB is determined to ensure that inflation returns to the 2% medium-term target in a timely manner and will maintain a sufficiently restrictive policy interest rate for as long as it takes to achieve this goal.

Reuters, citing sources, reported that the inflation rate may drop to 2% a few quarters earlier than initially expected. This has prompted some ECB policymakers to propose abandoning the commitment to maintaining a tight monetary policy in the recent monetary policy meeting, implying that more rate cuts are on the way.

The ECB's professional forecasters' survey reinforced this view. The survey showed that the inflation rate is expected to return to 2% much faster than anticipated, with an estimated inflation level of 1.9% for next year, lower than the 2% forecasted three months ago.

The decline in energy prices and weak economic growth both suggest that future price pressures are expected to continue to weaken. Last week, the European Union's statistical office revised the Eurozone's inflation rate for September from 1.8% down to 1.7%, marking the first time in over three years that the inflation rate has fallen below 2%. Subsequently, many economists have revised their inflation forecasts.

A report from HSBC expects the Eurozone's inflation rate to rise to 1.9% in October, to break through 2% again in December, and then to hover between 1.6% and 1.8% for most of the first half of 2025.

Analysts have pointed out that the acceleration of the deceleration of inflation in the Eurozone has strengthened expectations for rapid interest rate cuts by the ECB. The market expects that, given that the inflation rate is already very close to its 2% target and the Eurozone is facing the risk of economic recession, the ECB may cut interest rates at the next four to five meetings.The next European Central Bank (ECB) monetary policy meeting is scheduled to take place on December 12th in Frankfurt, Germany. Christine Lagarde has declined to reveal the thoughts of policymakers regarding actions at the upcoming meeting. She stated that more economic data will be reviewed before the December meeting, at which time the ECB will also release new economic forecasts.

Deutsche Bank analyst Mark Wall has indicated that the ECB's latest actions represent a turning point, as the bank is accelerating the easing of monetary policy through successive rate cuts to stimulate economic growth. The ECB is no longer tying rate cuts to macroeconomic forecasts on a quarterly basis but is instead handling them on a meeting-by-meeting basis, seemingly aiming to return interest rates to a neutral level as quickly as possible.

Capital Economics economist Jack Allen-Reynolds has stated that the latest economic data supports the ECB in cutting interest rates by at least 25 basis points at each of the upcoming policy meetings.

Economic Growth Outlook Remains Bleak

One of the significant reasons for the heightened expectations of rapid interest rate cuts by the ECB also includes the still-pessimistic economic growth outlook. Data from Eurostat shows that, seasonally adjusted, the Eurozone's Gross Domestic Product (GDP) grew by 0.2% quarter-on-quarter this year.

Lagarde admitted during a hearing at the European Parliament at the end of September that Europe's economic recovery is facing headwinds. However, she stated last week that, despite some Eurozone countries facing economic difficulties, the ECB does not believe a recession will occur in the Eurozone.

A recent research report from ING Group said that the Eurozone's economy is expected to stagnate in the fourth quarter and will only experience a mild recovery in the second quarter of next year. The institution also revised down its GDP growth forecast for the Eurozone to 0.6% for 2025.

A survey conducted by the ECB at the end of September among major companies showed that, although the expansion of the service sector offset the downturn in manufacturing, business activity is expected to grow moderately in the future, but the growth momentum is further weakening. The 95 large non-financial companies surveyed are increasingly concerned about competitiveness, high costs, green transformation, and political uncertainty. The survey indicates that this will lead companies to reduce investments and focus on cost-cutting, which will also undermine consumer confidence. These companies believe that price growth will further slow down, which may support the ECB in making rapid interest rate cuts.

Be Alert to Risks Such as Rising Oil Prices

Analysts believe that inflation in the Eurozone still has stickiness. As a key indicator of price pressure, service sector inflation remains high at 4%.Data indicates that in September, the service sector contributed the most (1.76 percentage points) to the annual inflation rate in the Eurozone, followed by food, beverages, and tobacco (0.47 percentage points), non-energy industrial goods (0.12 percentage points), and energy (negative 0.60 percentage points).

The recent continuous turmoil in the Middle East has led to global market concerns about the state of oil supply, intensifying fluctuations in international oil prices. Due to market fears that Israel might conduct airstrikes on Iranian oil facilities, on the 7th of this month, the price of Brent crude oil futures in London broke the $80 per barrel mark for the first time since August.

Analysts believe that if energy prices continue to rise, it could push European inflation higher again, slow down the European Central Bank's interest rate cuts, affect consumer spending and business investment, and hinder the pace of economic recovery.

Professor Hrvoje Krasic from the University of Zagreb in Croatia stated that if a larger-scale conflict occurs in the Middle East, oil prices could rise significantly, and Eurozone inflation would rebound, adversely affecting the European economy, which is already struggling with growth and has "decoupled" from Russian oil and gas.

A report from ING Group points out that if the conflict in the Middle East escalates further, it could lead to energy prices and inflation rates remaining high for a longer period than expected, thereby introducing more uncertainty into the pace of monetary policy easing.