ECB will cut rates more quickly than previously expected, HSBC says

By Louis Goss

The European Central Bank is likely to make sharper cuts to interest rates than previously expected, lowering in its key deposit rate by 25 basis points at each of its upcoming meetings from now until April 2025, HSBC said.

HSBC had previously expected the European Union's central bank would take a more measured approach, by cutting interest rates at every other meeting until its key deposit rate fell to 2.5% in September 2025.

Now, HSBC's analysts expect the ECB will act more quickly, in making a series of consecutive 25 basis point cuts in all five of the monetary policy meetings scheduled to take place between October this year and April 2025, until the key deposit rate drops to 2.25%.

The ECB previously cut interest rates by 25 basis points in September, to 3.5%, having previously made a similar 25 basis point rate cut in June, from 3.75%.

HSBC's chief European economist Simon Wells explained in a note that the European Union's central bank is now at risk of sparking a slump in the eurozone economy if they continue to keep interest rates high.

The British bank noted that even some of Europe's most hawkish central bankers, including Latvian central bank governor Martins Kazaks, are starting to become concerned about the risk of a slowdown if rates remain high.

"The economy is weak, and if rates stay too high for too long, it could cause the economy to slow down unnecessarily and unemployment to rise," Kazaks, who is a member of the ECB's governing council, said in an interview with Latvian news agency Leta.

HSBC's analysts noted that European purchasing manager indicators fell sharper than expected in September, in what saw the S&P Global Flash Eurozone Composite PMI Output Index fall below the key 50 point mark, in a sign of a contraction in Europe's economy.

Slower economic growth in top European economies including France and Germany and signs of a drop in inflation towards the ECB's 2% target could now pave the way for multiple rate cuts over the next six months.

-Louis Goss

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09-25-24 0647ET

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