The European Central Bank (ECB) slashed its deposit rate by a quarter-point for the second time this year, a clear reaction to weak economic growth and inflation that’s inching closer to the 2% target.
The decision was widely expected, and yet, financial markets barely reacted. It’s as if they shrugged and said, “Is that all you’ve got?”
The ECB has dialed down its 2024 growth forecast to 0.8%, slightly below the previous prediction of 0.9%. Domestic demand is expected to drag down growth in the coming quarters.
The central bank’s Governing Council was as vague as ever, repeating their tired old line about making decisions based on data and going meeting by meeting.
So no one really knows if another cut is coming in October or later in the year. Economists are split. They think the ECB might hit the pause button when they meet again on October 17, just like they did back in July.
Christine Lagarde, the President of the European Central Bank
But others are eyeing December 12 for the next potential quarter-point cut. According to LSEG data, there’s a 70% chance the ECB will leave rates unchanged in October, with only a 30% probability of another cut.
ECB President Christine Lagarde isn’t easing folks’ concerns. She made it crystal clear that they aren’t “pre-committing” to anything, leaving room for plenty of guesswork.
Carsten Brzeski from ING Research pointed out that inflation is still a bit sticky, partly thanks to wage negotiations in Germany. As long as that’s the case, the ECB will likely hold off on more aggressive rate reductions.
Brzeski doesn’t think we’ll see faster cuts until next year, and he’s not wrong to point out that the ECB’s record on predicting inflation isn’t exactly stellar.
But here’s the catch. With the Eurozone’s growth outlook looking weaker by the day, the ECB might have no choice but to act more aggressively at some point.
Brzeski believes that once the ECB fully realizes just how bad things are, they’ll be forced to make deeper cuts.
Lagarde, meanwhile, has been blunt about the risks to growth, citing lower demand for Eurozone exports and geopolitical tensions.
There’s also the not-so-small issue of how tighter monetary policy could have bigger effects down the road than anyone expects.
Market reaction and the crypto boost
After the ECB’s decision, the euro actually got a bit of a boost. It traded higher against the U.S. dollar, going up by about 0.21% to $1.103. Not a massive jump, but noteworthy.
Meanwhile, the crypto market saw an even bigger pop. Bitcoin took off, climbing to $58,258. That’s a 2.5% gain in just 24 hours.
Ether wasn’t far behind, inching up 1% to trade at $2,370. With Bitcoin’s market cap hitting $1.15 trillion and Ethereum’s sitting at $285.23 billion, the overall market cap climbed to roughly $2.05 trillion.
It’s a good day for crypto, despite the fact that trading volumes remain pretty low. Some crypto watchers are already looking past the ECB and toward the Federal Reserve.
Their rate cut might not have much of an effect on the market though. Many reasons are being floated around for this. For starters, crypto doesn’t play by the same rules as traditional markets.
While central banks obsess over interest rates, crypto traders are focused on things like adoption, regulatory news, and good old-fashioned sentiment.
There’s also the fact that the cut is already baked into the price. Traders have been expecting this move for a while, with about an 85% chance priced in for a 25 basis point cut on September 18.
So when it finally happens, it might not be the catalyst that people are hoping for.