ECB Cuts Interest Rates Amid Sluggish Euro Zone Growth

The European Central Bank announced a 25-basis point interest rate cut, while tweaking its economic forecasts. Yields on Euro zone government bonds were mixed following this decision. Analysts predict another rate cut in December, contingent on new economic forecasts, while money markets priced in further monetary easing by year-end.

The European Central Bank (ECB) implemented a widely anticipated 25 basis points interest rate cut on Thursday and slightly adjusted its economic forecasts. This move comes as inflation decelerates and economic growth wanes, yet the ECB offered scant guidance on its future steps, fueling investor speculation about continued policy easing.

Massimiliano Maxia, a fixed income specialist at Allianz Global Investors, commented, "The central bank changed its economic forecasts marginally. We still expect another rate cut in December." The Euro zone's borrowing costs decreased on Wednesday, influenced by U.S. Treasuries, after data revealed persistent U.S. underlying inflation, dampening expectations for a substantial interest rate cut by the Federal Reserve next week.

German 10-year Bund yields rose 1.5 basis points to 2.114%, relatively stable post-ECB statement, after a 5 bps drop the day before. Some analysts suggested that if ECB President Christine Lagarde emphasizes quarterly projections, the probability of an October rate cut—currently 40%—could decline. Money markets have factored in 35 bps of easing by year-end, indicating a 25 bps cut and a 40% chance for an additional cut.

The deposit facility rate stands at 3.50%. Analysts predominantly foresee the ECB making a 25 bps easing move each quarter based on new forecasts, implying a December rate cut. Germany's 2-year Schatz yields increased by 4 bps to 2.17%. The premium over 10-year debt was 7 bps, up slightly from 6.8 bps before the ECB statement. Italian 10-year yields fell 2 bps to 3.51%, maintaining their premium over Bunds at 140.5 bps.

(With inputs from agencies.)