After the European Central Bank reduced interest rates last Thursday to prop up a weakening economy, wealth managers share their insights on the impact.

With Germany on the brink of a recession and inflation falling across the EU, last Thursday the European Central Bank (ECB) reduced interest rates to 3.25 per cent from 3.5 per cent

Revised annual inflation figures for the euro area came in at 1.7 per cent in September, down from 1.8 per cent, and below the bank’s 2 per cent target.

Here are some reactions from wealth managers to the drop.

David Zahn, head of European fixed income at Franklin Templeton
“Today’s rate cut of 25 basis points by the European Central Bank is in response to weak economic indicators and falling inflation below 2 per cent. With slow growth across Europe, the ECB will continue their rate cutting cycle to below 2 per cent by mid-2025. Looking ahead to December, the ECB is expected to cut rates again by 25 bps to continue to address slow economic growth and below target inflation. There are signs that inflation might rebound as we head into late 2024 which could lead the ECB to adopt a more cautious approach in its rate easing cycle. However, that could be seen as an error as inflation will move back below target in 2025, further supporting interest rate cuts. With this monetary backdrop, European fixed income looks attractive as there should be a supportive central bank for some time.”

William Vaughan, associate portfolio manager at Brandywine Global
“Today’s European Central Bank rate cut of 25 basis points is driven by a combination of weak economic growth and low inflation rates. Recent Purchasing Managers (PMIS) Index indicators reflect this sluggishness, with many sectors reporting contraction or stagnation, highlighting the key challenges facing the region. 

The ECB’s recent loan survey indicates a robust credit impulse, suggesting that while economic growth is slow, banks are willing to lend more, which could drive investment and consumption. Today’s rate cut will likely aim to leverage the current momentum to support a rebound in economic activity, even if inflation remains a concern. This dual focus reflects the central banks’ attempt to navigate the delicate balance between nurturing growth whilst controlling inflation against an unpredictable backdrop.”

Isaac Stell, investment manager at Wealth Club
“The ECB is now likely to switch its focus from fighting inflation to its new opponent, fighting weak economic growth. The lacklustre growth in the euro area, which expanded by just 0.2 per cent in the three months to June 2024, highlights the need for a turnaround in fortunes. With Germany currently on the ropes, having seen its GDP contract by 0.1 per cent during the same period, the ECB has swung from the hip, to help stave off any further economic blows. Only time will tell if the latest medicine will help to heal the economic bruises, stimulate demand and leave the euro area ready for another round.”

Mahmood Pradhan, head of global macro economics at Amundi Investment Institute
“The ECB stopped short of forward guidance but we expect quarter point cuts every meeting between now and April. Its comfort with disinflation underway and labour costs – despite unprecedentedly low unemployment – provides ample room to get to a less restrictive stance faster.” 

Nadia Gharbi, senior economist at Pictet Wealth Management
“As expected, the ECB remained cautious and provided little guidance on the next steps, with Lagarde emphasising that the ECB will remain "data dependent and follow a meeting-by-meeting approach." Today’s decision to cut by 25 bps was mentioned as “proof” of ECB’s data dependency. Importantly, while she did not commit to anything, Lagarde did not close the door to faster rate cuts and emphasised the importance of staff projections and the next data releases in the coming weeks. In all, the focus in December will be on the revision of the staff projections. We maintain our view that the ECB will cut by 25 bps at each meeting until June 2025, bringing the deposit rate to 2 per cent. Risks are tilted towards a lower terminal rate."

Nicolas Forest, chief investment officer at Candriam
“While today’s ECB rate cut was widely expected, European stocks rose and short-term rates fall supported by downside risks pointed to growth and to inflation.The disinflation process supports the easing cycle in the UK and US also. The ECB is clearly sticking to its data-dependent approach with no guidance on further cuts. While China policy support and the last ECB bank lending survey might offer some boost, the German economy is contracting, the manufacturing sector is struggling, and the US elections are looming. Trade tariffs are a downside risk for the European economy as its trade openness makes the euro vulnerable to world growth. Future monetary policy decisions will be informed by incoming data as well as extended quarter macro projections and we expect another cut in December.”

Konstantin Veit, portfolio manager at PIMCO
“While the macroeconomic backdrop is somewhat weaker than previously expected, risk management considerations seem to have played an important role. Upside shocks to inflation could be addressed by a slower pace of rate reductions, while today’s cut is seen as offering additional protection against downside risks. Given still elevated domestic inflation, largely reflecting price pressures in the services sector, monetary policy will remain tight for now. The data flow over the coming months will decide the speed at which the ECB continues to make policy less restrictive. We expect a governing council discussion around the appropriate neutral policy rate configuration next year, when the policy rate falls below 3 per cent. We think the ECB will cut again in December, and the terminal rate pricing of around 1.85 per cent for the second half of next year looks reasonable to us."

Felix Feather, economist at abrdn
"The ECB’s decision to cut rates by 25 bps today comes as no surprise. While it declined to pre-commit to further cuts, we think the ECB’s framing of the decision reinforces our expectations for three further cuts by March 2025. An inflation shock arising from Middle East-related tensions could prompt the ECB to move more cautiously. On the other hand, it could cut rates more aggressively if the bloc falls into recession.”

Laura Cooper, global investment strategist at Nuveen 
“The data-dependent approach from the ECB, with no pre-determined policy path, will do little to deter a dovish December cut. In our view, the balance of risks has tilted to the downside, cemented by a deteriorating economic backdrop and softening services inflation.

“While a dovish read from a disinflationary process is ‘well on track’, key to watch for the path forward will be whether policymakers focus on the persistence of services price pressures or show more conviction that easing wage prospects will guide inflation lower. On growth, any hints of emerging bright spots, like those gleaned from the ECB bank lending survey, could be tempered by the need to grind to neutral more quickly in a race to avert a recession. All in, downward revisions to forecasts in December should accompany more easing, continuing with consecutive 25 bps rate cuts through to March. It’s then that upside growth risks from rising real incomes, spillover from China stimulus, and a nascent inventory cycle upswing could warrant another policy pivot, this time a pause around 2-2.5 per cent. 

“But for now, with French political frictions playing out in wider spreads and German weakness becoming more entrenched, a defensive investment stance is prudent. We are leaning into EGB duration, continue to see value in German bunds and select periphery exposures like Italian BTPs for attractive carry, though fading euro dollar weakness and cyclical equity exposures as US election uncertainty looms.”