Inflation fell to 1.8 percent across the 20 members of the euro area in September, the first time it has been below the ECB’s target of two percent since 2021.

While the rate is expected to tick up again towards the end of the year, the sense that consumer prices are back under control has grown.

“Victory against inflation is in sight,” French central bank governor Francois Villeroy de Galhau, who sits on the ECB’s rate-setting governing council, said last week.

“A cut is very likely,” he told Franceinfo radio, adding that “it will not be the last”.

ECB policymakers will meet in Slovenia Thursday to decide whether to reduce rates further and up the tempo of cuts. The central bank is headquartered in Frankfurt but sometimes holds monetary policy meetings in other parts of the eurozone.

The bank has already cut rates twice from their peak of four percent, once in June and again at its last meeting in September.

The ECB lowered the interest on its deposit facility by 25 basis points in each case, leaving the benchmark rate at 3.5 percent.

But new data showing weaker price pressures and economic activity confirmed the impression that “policy rates are too restrictive in the euro area”, said Frederik Ducrozet, chief economist at Pictet Wealth Management.

‘Progressing’

In response to soaring inflation triggered by the unwinding of coronavirus pandemic lockdowns and Russia’s invasion of Ukraine, the ECB had raised rates further and faster than ever before.

The moves to raise borrowing costs and slow the pace of consumer price rises had their effect. The ECB’s efforts to tame inflation were “progressing”, the bank’s president Christine Lagarde said last month.

Recent economic indicators “strengthen our confidence that inflation will return to target in a timely manner”, Lagarde told the European Parliament.

The ECB would take the fresh figures “into account in our next monetary policy meeting”, she said.

In the name of “data dependence”, the ECB has tended to move with the rhythm of its forecasts, which are updated at every other meeting, with the next batch due in December.

Rate-setters could be tempted to act “preemptively” to avoid suffocating growth too much, Ducrozet said, predicting another cut of 25 basis points on Thursday.

Last month’s ECB forecasts already showed eurozone growth slowing to 0.2 percent in the third quarter, and weak morale among businesses had further clouded the outlook.

The bloc’s biggest economy Germany has also struggled to get going, with Berlin last week saying it now expects the economy to shrink by 0.2 percent in 2024 — a second straight year in recession.

Downside risks

“Risks are now clearly tilted to the downside”, when it comes to economic growth, said ING analyst Carsten Brzeski.

However, the possibility that the ECB would hold rates steady in October “cannot be excluded entirely”, Brzeski said.

A cut would put the ECB “ahead of the curve”, Brzeski said, lowering rates “just in time before a more economic accident would happen”.

But a quick response, when officials have stressed the need to move gradually, would still be “controversial”, he said.

The threat that an escalation in the conflict in the Middle East could send oil prices up again was another factor that could stay the ECB’s hand, Brzeski said.

Whatever the decision, observers will be listening closely to Lagarde’s press statement for any hints of what the ECB will do next.

“Inflation is down but not out,” said analysts at HSBC bank.

Even if rates come down Thursday, the ECB would “not pre-commit to further cuts” and “express caution on the future rates path”, they said.