Policymakers at the European Central Bank (ECB) are divided on whether to implement a large interest rate cut in December, despite growing risks to both economic growth and inflation. As the global economy faces slowdown pressures, the ECB has already implemented its third 25-basis-point rate cut this year in October. This marks the first time in 13 years that the ECB has delivered back-to-back rate cuts, reflecting its attempt to manage the eurozone’s weakening economic outlook and declining inflation.

Economic Context and Current Policy

Global economic slowdown has become increasingly evident, and the ECB has responded with multiple rate cuts in an effort to stimulate growth. Recent data shows that inflation in the eurozone fell to 1.7% in September, down from 1.8% in the initial estimate and well below the 2.2% reported in August. This marks the first time inflation has dropped below the ECB’s 2% target since June 2021. The sustained decline in inflation has led to market expectations of further rate cuts in the coming months.

Diverging Views Among Policymakers

Despite growing expectations for more monetary easing, ECB policymakers remain divided on how aggressive the central bank’s approach should be. One of the more vocal advocates for larger rate cuts is Mario Centeno, the governor of Portugal’s central bank. Centeno argues that the September inflation data was “well below expectations,” suggesting that a larger 50-basis-point rate cut should be on the table for the ECB’s December meeting. He emphasized that ECB decisions are data-dependent, and if incoming data continues to support the need for more significant monetary easing, the ECB should be prepared to act. Dutch central banker Klaas Knot echoed similar views, stating that a 50-basis-point rate cut in December should not be ruled out. However, he added that such a move would require a significant deterioration in economic data. Knot expressed confidence that inflation would return to the 2% target by next year, and if economic projections align with this view, the ECB could “gradually take its foot off the brake” and continue cutting rates until reaching a neutral policy stance, where the economy is neither stimulated nor constrained. On the other hand, Austrian central bank governor Robert Holzmann expressed more caution about aggressive rate cuts. While acknowledging that some of his colleagues might favor a larger rate cut, he personally prefers to base decisions on the data at hand. Holzmann described the recent 25-basis-point rate cut as a “precautionary” move, suggesting that it is still plausible for the ECB to pause further cuts in December. He also hinted that while another 25-basis-point cut might be possible if conditions worsen, a larger 50-basis-point reduction seems unlikely based on current data.

Policy Uncertainty

ECB President Christine Lagarde has previously emphasized that the ECB will continue to evaluate the effectiveness of the 25-basis-point rate cuts and stressed that the bank remains highly dependent on economic data. She also warned that, while inflation is trending lower, the ongoing slowdown in economic growth may add more uncertainty to future monetary policy decisions. Other ECB officials share similar sentiments. Gediminas Šimkus, governor of the Bank of Lithuania, stated that while the ECB is clearly moving toward more accommodative monetary policy, he remains cautious about calls for “super cuts.” Šimkus highlighted that any future rate cuts will depend on how the economic situation develops in the coming months, suggesting that dramatic moves are unlikely unless there is a significant negative shock. German central banker Joachim Nagel also expressed reservations about committing to large rate cuts at this point. He pointed out the high level of uncertainty in the current economic environment, underscoring that the ECB’s next steps will be based on new economic data. Nagel refused to speculate on the exact size of future rate cuts but stressed the need for flexibility in policy decisions.

Outlook

As the debate within the ECB intensifies over the extent of future rate cuts, market participants are closely monitoring incoming economic data to gauge the likely direction of ECB policy. Inflation and growth trends will continue to play a critical role in shaping monetary policy. With other major central banks also easing their monetary stances, the ECB’s decisions will not only influence the eurozone’s economic prospects but will also have significant implications for the global financial markets. For forex market participants, keeping an eye on eurozone economic data, inflation trends, and potential ECB policy shifts will be crucial in navigating the evolving landscape. The ECB’s next moves could create volatility in the euro and impact global financial markets, making it vital for investors to stay informed on these developments.