A survey by the European Central Bank (ECB) indicates that consumer inflation expectations in the eurozone continued to decline in September, which may give policymakers more confidence that they could reach their inflation target earlier than previously anticipated. The ECB's monthly survey reveals that consumers in the eurozone expect an inflation rate of 2.4% over the next 12 months, marking the lowest level since September 2021 and lower than the 2.7% anticipated in the August survey. Moreover, consumers anticipate an inflation rate of 2.1% over the next three years, down from the 2.3% expected in the August survey.

The survey also shows that consumers hold a pessimistic view of the eurozone economy, expecting a contraction of 0.9% over the next 12 months, consistent with the results from the August survey. The survey indicates that consumer expectations for the unemployment rate over the next 12 months have risen from 10.4% to 10.6%.

Since inflation expectations play a crucial role in driving inflation back down, this result supports ECB officials who advocate for faster rate cuts. This week, ECB Governing Council member and Banque de France Governor Francois Villeroy de Galhau stated that the central bank must remain alert to the possibility of further rate cuts to avoid the risk of acting too slowly. Bank of Italy Governor Fabio Panetta also remarked, "Low inflation and weak economic growth coexisting clearly favors further easing of monetary policy. Given that the ECB is likely to reach the 2% inflation target 'much earlier' than its September forecast of the end of 2025, the direction of interest rates is clear, and the necessity of reducing borrowing costs below the neutral level cannot be ruled out."

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The ECB conducted its third rate cut this year last week, and its second consecutive rate cut, lowering the deposit facility rate to 3.25%. Meanwhile, inflation falling below 2% and weak economic growth have prompted investors to increase their bets on more substantial rate cuts by the ECB. Investors anticipate a series of rate cuts by the ECB, with the deposit facility rate expected to drop to 2% by mid-2025.

Furthermore, according to several informed sources, ECB policymakers have begun discussing whether it is necessary to lower interest rates to a level sufficient to stimulate the economy, known as below the so-called neutral rate. The sources say that some policymakers believe the ECB is already behind the curve and needs more substantial rate cuts than previously anticipated to prevent inflation from being too low—a view held by a minority of policymakers but one that is growing.

The swap market suggests a 45% probability that the ECB will cut rates by 50 basis points at its last meeting of the year. Prior to the ECB's decision to cut rates by 25 basis points last week, the market only expected a 25 basis point cut in December.

However, some ECB officials are cautious about accelerating the pace of rate cuts. ECB Governing Council member Pierre Wunsch believes that, despite signs of weakness in the eurozone economy, it is too early to discuss a half-percentage point rate cut in December. He emphasizes that officials need to wait for further inflation data and observe economic developments before drawing conclusions. ECB President Christine Lagarde also stated earlier this week that, while the direction of interest rates is clearly downward, the speed of rate cuts needs to be determined based on new data. Several ECB officials who spoke this week have emphasized the data dependency of future interest rate policy, arguing that in December, whether to cut rates or by 25 or 50 basis points, reference must be made to the data released.