European Central Bank (ECB) President Christine Lagarde has given the clearest signal yet that interest rates are heading lower this year.

One day after the ECB delivered its second quarter-point rate cut since June, Lagarde said she wouldn’t rule out another reduction in October if economic conditions deteriorate.

However, as Bloomberg reported, the ECB chief prefers to wait until December to lower the deposit rate again.

In the meantime, the ECB will remain vigilant of any changes to economic conditions.

“We look at everything, and if there is a significant change relative to our baseline, we reassess,” Lagarde told reporters in Budapest, Hungary.

Lagarde’s outlook was reinforced by Latvia’s Martins Kazaks, who sits on the ECB’s Governing Council.

The likelihood of an October rate cut “isn’t big,” said Kazaks. “But at the same time, if there’s an unexpected hit to the economy, and if the economy feels significantly weaker than is currently expected and inflation also declines significantly, then of course we could also consider a rate cut.”

Austrian Governing Council member Robert Holzmann agreed, saying there’s “room” for another 0.25% reduction in December.

Despite their concerns about inflation, ECB officials are clearly placing more emphasis on the economy as the eurozone tries to avoid another downturn.

Eurozone economy in focus

The eurozone’s post-pandemic recovery hit a snag this year as its “big three” members—Germany, France, and Italy—posted disappointing results.

Germany—the currency bloc’s biggest contributor—has barely escaped its recessionary spiral from last year. Its GDP shrank by 0.1% in the second quarter.

The Italian economy also weakened to a 0.2% growth pace in the second quarter, down from 0.3% in the first three months of the year.

France has avoided recession, but its growth has weakened in each of the last two quarters, expanding at a 0.2% rate between April and June.

A further slowdown in the French economy “cannot be ruled out in the coming quarters,” said ING Bank analysts Carsten Brzeski, Philippe Ledent, and Paolo Pizzolo.

The analysts cited rising unemployment, declining business confidence, and weak consumption as primary concerns.

Disappointing results from France, in particular, forced Eurostat to revise downward its estimate of eurozone GDP growth. As Creditnews reported, the 20-nation currency bloc expanded by just 0.2% in the second quarter after an initial estimate of 0.3%.

For these reasons, ECB officials have shifted their focus from inflation to the economy. According to Italian Governing Council member Piero Cipollone, “Europe desperately needs growth” and investment.

In Cipollone’s view, any delay in lowering interest rates “puts us at a serious disadvantage.”

His Italian colleague, Fabio Panetta, said during the summer that it would be “reasonable” to expect further reductions in interest rates to stimulate growth.

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