Synopsis:

Danske analyzes the European Central Bank's recent decision to cut rates and discusses the implications for future monetary policy.

Key Points:

• Disinflationary Process Acknowledged:
  The ECB noted that recent information indicates the disinflationary process is progressing well, driven by lower inflation momentum, particularly in the services sector.

• Inflation Surprises:
  ECB President Lagarde highlighted that the acceleration in inflation momentum, with September's inflation recorded at 1.7% year-over-year, came as a surprise to the Governing Council.

• Restrictive Financing Conditions:
  The ECB referenced that financing conditions remain restrictive, prompting questions about how long the current policy stance can remain in place given the weak economic activity and ongoing disinflation.

• Future Rate Cuts Forecast:
  Danske anticipates that the ECB will cut rates to 2% by the end of next year, which is viewed as a neutral policy rate. However, there is a significant concern about the possibility of needing to cut rates even further if economic conditions continue to weaken.

Conclusion:

The ECB's recent rate cut reflects its response to softer inflation and economic activity. Moving forward, the central bank faces a delicate balancing act between managing inflation and supporting economic growth, with the potential for further cuts depending on evolving economic indicators.