As widely anticipated, the ECB today delivered a second successive cut in key interest rates - its third of the current cycle. Having already reduced the key deposit rate by 25 basis points in September, the central bank repeated the move to leave the benchmark rate at 3.25 percent, matching its lowest level since May last year. The refi rate (3.40 percent) and the rate on the marginal lending facility (3.65 percent) were also cut by the same amount and the loose forward guidance stating that the bank"will keep policy rates sufficiently restrictive for as long as necessary" to achieve the 2 percent inflation target was retained. The decision was again unanimous.

Once again there was nothing new on QT which, since July when the pandemic emergency purchase programme (PEPP) was included alongside the asset purchase programme (APP), has seen net asset sales of around €90 billion. However, there is a still long way to go to shrink the bank's balance sheet back to more normal levels.

The path to the latest ease was effectively cleared by September's surprisingly sharp fall in inflation (revised down to 1.7 percent earlier today). This was the first sub-target reading since June 2021 and although the decline in the core rates has been less marked, these too are moving in the right direction. However, it is unlikely to be all one-way traffic. The ECB expects inflation to rise over coming months before declining to target in the course of next year. It also noted that domestic inflation remains high and wages are still rising at an elevated pace. Still, labour cost pressures are seen easing gradually, with profits partially buffering their impact on prices. Moreover, the Eurozone economy has been both sluggish and weaker than expected. Third quarter growth is unlikely to impress.

The next, and last, ECB meeting of 2024 will be on 12 December and will include the unveiling of an updated set of economic forecasts. Ahead of that, policy will remain data-dependent although financial markets have already priced in another 25 basis point cut. Unless inflation surprises on the upside in the interim, they look likely to be proved right.

With inflation having fallen below target last month and the real economy essentially flatlining, forecasters anticipate a second successive 25 basis point cut in the key deposit rate to 3.25 percent. The refi rate should follow suit to stand at 3.40 percent.

The European Central Bank (ECB) sets monetary policy for all members of the Eurozone. The highest decision-making body is the Governing Council which comprises the six members of the Executive Board and the 20 presidents of member central banks. Policy meetings take place roughly every six weeks but, due to the sheer number of participants, a rotation system has been introduced so that the total number of votes is capped at twenty-one. The benchmark interest rate is the rate on the main refinancing operations (refi rate) which sits between the marginal lending facility rate and deposit rate. The ECB's primary objective is price stability which since July 2021 is based upon a symmetric 2 percent target for the annual inflation rate.

The European Central Bank determines interest rate policy at their Governing Council meetings. The Council is composed of the six members of the Executive Council and 17 presidents of member central banks (Bank of France, Bundesbank, etc). The Governing Council meets now meets every six weeks. The European Central Bank had an established inflation ceiling of just less than 2 percent which was modified in July 2021 to 2 percent. The ECB's measure of inflation is the harmonized index of consumer prices (HICP). Each member of the Governing Council has one vote and decisions are reached by simple majority. In the event of a tie, the President has the casting vote. Only short-form minutes are released so how individual members voted is not known.

As in the United States, European market participants speculate about the possibility of an interest rate change at these meetings. If the outcome is different from expectations, the impact on European markets can be dramatic and far-reaching. The rate set by the ECB serves as a benchmark for all other interest rates in the Eurozone.

The level of interest rates affects the economy. Higher interest rates tend to slow economic activity; lower interest rates stimulate economic activity. Either way, interest rates influence the sales environment. In the consumer sector, few homes or cars will be purchased when interest rates rise. Furthermore, interest rate costs are a significant factor for many businesses, particularly for companies with high debt loads or who have to finance high inventory levels. This interest cost has a direct impact on corporate profits. The bottom line is that higher interest rates are bearish for the stock market, while lower interest rates are bullish.