CITIC SEC: It is expected that the European Central Bank will cut interest rates again in December, and the US dollar index may remain volatile in the near future.

CITIC SEC released a research report stating that the European Central Bank (ECB) lowered the deposit facility rate by 25 basis points as scheduled in September, and reduced the main refinancing rate and marginal lending facility rate by 60 basis points each. They also raised the core inflation forecast for the next two years while lowering the growth forecast for the next three years. The report retained the wording indicating high wage growth but added a phrase indicating pressure on economic activity. The decision to narrow the interest rate corridor this time is a technical adjustment and theoretically should not significantly disrupt market interest rates. The deposit facility rate remains the key policy rate to reference after the adjustment. CITIC SEC maintains its forecast of three ECB rate cuts for the full year, expecting another rate cut in December. The main points of the ECB's September policy meeting decision were as follows: 1) Interest rate tools: The deposit facility rate was lowered by 25 basis points to 3.50%, and the main refinancing rate and marginal lending facility rate were lowered by 60 basis points each to 3.65% and 3.90% respectively. The new rates will be effective from September 18th. The ECB stated it would maintain a data-dependent strategy and not commit to a specific rate path in advance, which is consistent with previous decisions. 2) Other tools: The ECB has stopped reinvesting maturing principal of APP assets and is steadily reducing its portfolio size as planned. It announced a monthly reduction of 75 billion in PEPP asset holdings in the second half of the year, with plans to terminate reinvestments by the end of the year. These decisions are consistent with previous ones. The decision statement of the ECB's September policy meeting was neutral, with three key points worth noting: 1) The core inflation forecast for the next two years was raised, while the growth forecast for the next three years was lowered. The ECB forecasts total inflation in the euro area for the next three years to be 2.5%, 2.2%, and 1.9% respectively, and core inflation rates to be 2.9%, 2.3%, and 2.0% respectively. This is mainly due to services inflation exceeding expectations, with economic growth forecasts downgraded due to lower domestic demand. 2) The wording indicating high wage growth was retained, with added mention of pressure on economic activity. The ECB kept the wording on high internal price pressures and wage growth, but added a statement indicating weakening labor cost pressures, as well as highlighting the impact of wage increases being cushioned by business profits. Compared to the decision in July, the ECB added a statement in this decision indicating that economic activity is still subdued, with weak consumption and investment demand in the private sector. 3) The rationale for the different magnitudes of rate cuts for the three key rates was explained. The ECB announced in March that it would reduce the spread between the main refinancing rate (MRO) and the deposit facility rate (DFR) from the current 50 basis points to 15 basis points, while maintaining the spread between the marginal lending facility rate (MLF) and the main refinancing rate (MRO) at 25 basis points. Key points of Lagarde's speech include: 1) Eurozone economic growth in the second quarter was weak, with uncertainties leaning towards the downside. Lagarde noted that economic growth in the eurozone in the second quarter was below ECB expectations, with weak consumption and investment demand. The services sector showed resilience, but the industrial and construction sectors were dragging, although the job market remained stable. Expected real wage growth will support consumption recovery, and exports will increase, strengthening overall economic recovery momentum. 2) Price pressures are high, and the easing of labor cost pressures is expected to support the disinflation process. Lagarde mentioned that most indicators measuring underlying inflation remained roughly the same in July, with a specific indicator called the "domestic inflation indicator" dropping slightly from 4.5% to 4.4%. She emphasized that this decrease was not satisfactory, indicating a reason for the ECB to maintain caution regarding the pace and magnitude of rate cuts. 3) Financial conditions are restrictive, and credit demand is overall weak. Lagarde pointed out that financing conditions in the eurozone remain restrictive, with weak credit growth and declining market interest rates due to global economic outlook weakening and inflation pressures easing. The ECB's decision to narrow the interest rate corridor is a technical adjustment and part of the reform of its monetary policy operational framework. The decision to narrow the interest rate corridor this time is one of the main contents of the reform of the ECB's monetary policy operational framework, indicating a transition from the current "de facto floor system" to a "soft floor system." The latter theoretically combines the advantages of a smaller balance sheet and smaller fluctuations in market interest rates. After narrowing the interest rate corridor, the DFR will continue to be the primary reference rate for the ECB's monetary policy stance, and market interest rates will continue to fluctuate near the DFR. The change lies in the narrowing of the MRO-DFR spread, which is expected to increase the willingness of private sector banks to participate in the ECB's weekly refinancing operations when there is liquidity demand, reducing the potential risk of market interest rate volatility when the future monetary system liquidity becomes less abundant. Therefore, the decision to narrow the interest rate corridor is only a technical adjustment and does not signal additional monetary easing policy. The decision should not inject additional liquidity into the money market in the near term or significantly disrupt market interest rates. CITIC SEC maintains its forecast of three ECB rate cuts for the full year and expects the ECB to cut rates again in December. On one hand, the ECB's current policy rates are restrictive, which helps to continue to suppress labor demand, reduce wage growth, and indicators such as the PCCI indicate that the degree of weakening inflation momentum in the eurozone is already sufficient. Therefore, the ECB has room to further reduce the constraints on monetary policy this year. On the other hand, inflation remains relatively high in the eurozone services sector, and the ECB's forecast for core HICP year-on-year for the fourth quarter of the year has been revised from 2.6% to 2.9%, reflecting the stickiness of internal inflation in the region. At the same time, the eurozone is.The unemployment rate is still at a historic low of 6.4%. Therefore, in the context of two interest rate cuts this year and with price stability as the sole main objective, the European Central Bank may still need to retain restrictive interest rates to curb service inflation momentum.In general, CITIC SEC maintains its forecast that the ECB will cut interest rates three times by 25 basis points each throughout the year and expects the ECB to cut rates again in December; at the same time, market pricing for a rate cut by the Federal Reserve this year is already quite full, so the US dollar index may continue to fluctuate in the near term, and further downside potential may require new data catalysts to fully materialize.