Clear Signals of Inflation Retreat, Easing Pressure on the ECB
Recent data shows that inflation expectations in the eurozone have decreased for the third consecutive month, with consumer confidence gradually recovering. The ECB's consumer expectation survey indicates that expectations for inflation over the next 12 months have fallen from 2.8% in August to 2.7%, while the three-year outlook remains steady at 2.5%. This result suggests that the persistent price pressures after the pandemic are gradually subsiding and that inflation risks are largely under control.
Meanwhile, respondents' expectations for inflation over the next five years remain at 2.2%, closely aligning with the ECB's medium-term target. Analysts believe this trend provides the ECB with more policy flexibility and offers ample rationale to keep interest rates unchanged at the upcoming policy meeting.
The eurozone previously experienced the dual shock of soaring energy prices and supply chain bottlenecks, with inflation rates remaining above target for a long time. However, with energy markets stabilizing, supply recovering, and wage growth slowing, the upward pressure on prices has noticeably weakened.
Stable Economic Growth, Eurozone Poised for a "Soft Landing"
Beyond easing inflation, overall economic activity in the eurozone is showing signs of moderate recovery. The latest PMI data reflects a gradual slowing in manufacturing contraction and stable expansion in the service sector. The rebound in export orders from Germany and Spain, as well as France's reviving consumer spending, has kept overall economic growth in positive territory.
Economists point out that this combination of "low inflation plus stable growth" marks the eurozone's entry into an ideal "soft landing" phase. Despite fiscal deficit pressures in some countries, the strong economic foundation provides the ECB with conditions to adopt a cautious policy stance.
ING analysts state: "The macro environment in the eurozone is becoming more balanced. As inflation cools, consumer purchasing power improves, and business confidence slightly increases, suggesting the economy is gradually recovering from the impact of tightening policies."
Policy Outlook: Stability as the Main Theme
The market broadly expects the ECB to maintain the main refinancing rate at 2% at Thursday's policy meeting. In recent months, the decision-makers have repeatedly emphasized the need to observe the cumulative effects of tightening policies, and noted that the current disinflation trend validates the effectiveness of prior tightening measures.
ECB Governing Council member Escriva recently stated that the current borrowing cost levels are "appropriate and stable," and there is no immediate need for further rate hikes. Several investment banks also predict the ECB will extend the rate stabilization cycle until the first half of 2026 to ensure inflation aligns with targets.
At the same time, expectations for a possible rate cut by the ECB next year are gradually rising. If economic growth continues to slow and inflation further cools, policymakers may consider moderate policy adjustments by mid-2025 to avoid overly restrictive effects on employment and investment.
Mild Euro Performance, Rising Market Risk Appetite
With improving macroeconomic data and stable policy backdrop, the EUR/USD has recently shown steady performance, fluctuating between the 1.16 and 1.17 range. Investor confidence in the European economy has somewhat recovered, and risk appetite sentiment has clearly improved.
Forex strategists point out that if the ECB's statements convey optimism about economic growth, the euro may gain further support. However, if the Federal Reserve continues to cut rates and dollar liquidity increases, it could exert some pressure on the euro.
Manageable Inflation Risk, Positive Economic Signals
Overall, the eurozone economy is transitioning from "high inflation anxiety" to a "steady growth phase," with policy conditions becoming more balanced. With a recovery in consumption, labor market stability, and continued fiscal support, the eurozone is poised to maintain moderate expansion in the coming quarters.
Analysts believe this scenario indicates that the ECB has largely achieved its policy goal of "orderly cooling." In the future, the policy focus will shift from purely curbing inflation to balancing growth and stability, suggesting the eurozone's "soft landing" story may just be beginning.
