European Central Bank rate decision in focus ahead of Fed meeting

European stocks rallied on Thursday as investors looked ahead to the European Central Bank’s monetary policy meeting.

The pan-European Stoxx 600 traded 1.1% higher at around 11 a.m. London time, holding gains from the start of the trading session.

Mining stocks rose nearly 3%, with all sectors trading in positive territory.

— Sam Meredith

The European Central Bank is widely expected to cut interest rates by 25 basis points on Thursday, although for many investors the bigger question is what will follow in the coming months.

“Two more rate cuts this year makes sense, but if the ECB doesn’t cut in October, the data could prevent a second cut in December,” economists at Pantheon Macroeconomics, a consultancy, said a in research note published Wednesday.

“A further near-term decline in headline inflation, softness in economic surveys, the beginning of Fed easing, and a slowdown in US employment growth have kept an October rate cut in our forecasts,” they added.

“By contrast, our forecast of a sharp rebound in Q4 core inflation has prompted us to pull the December cut. If the ECB stands pat in October, which is currently the market baseline, risks are tilted towards this week’s cut being the last for the year.”

— Sam Meredith

Economists and strategists overwhelmingly expect the European Central Bank to deliver a quarter-point interest rate cut on Thursday, with investors poised to scrutinize statements for clues on what could follow over the coming months.

The highly anticipated rate decision is expected at 1:15 p.m. London time, with ECB President Christine Lagarde set to lead a press conference from 1:45 p.m. London time.

Lagarde is seen as likely to stick to central bank’s recent narrative that interest rate decisions are data-dependent and taken on a meeting-by-meeting basis.

Market participants will closely monitor any comments that suggest whether the ECB chief is willing to keep the door open for another rate cut as soon as next month.

— Sam Meredith

The European Central Bank is poised to deliver a quarter-point interest rate cut on Thursday, but strategists at Saxo Bank have warned investors that the central bank is unlikely to offer any clear forward guidance.

“The market is widely expecting a 25 basis point cut at Thursday’s meeting, and we think the ECB will deliver,” Althea Spinozzi, head of fixed income strategy at Saxo Bank, said in a research note published on Sept. 6.

“However, don’t expect the ECB to provide any clear forward guidance on what happens next. Policymakers are likely to remain data-dependent, monitoring the inflation and growth outlook closely before making further moves,” Spinozzi said.

— Sam Meredith

The euro traded mixed against the U.S. dollar ahead of the European Central Bank’s monetary policy meeting.

As of 9:00 a.m. London time on Thursday morning, the euro hovered at around $1.1, little changed from the previous session.

— Sam Meredith

A change of phase in the monetary fabric that underpins the global economy is set to get underway, according to one strategist, and it could spur further market upside.

“We’re entering a cutting phase,” John Bilton, global head of multi-asset strategy at J.P. Morgan Asset Management, told CNBC’s “Squawk Box Europe” on Thursday.

“We’re going to see that probably today from the ECB, chances are with 25 [basis points], likely on the 18th next week with 25 [basis points] from the Fed, the Bank of England likely getting in on the party after what we saw in the data yesterday,” he continued.

“So, all in all, we have all the ingredients for the beginning of a fairly extended cutting cycle but one that is probably not associated with a recession — and that’s an unusual set-up,” Bilton said.

“It means that we get a lot of volatility to my mind in terms of price discovery around those who believe that actually the Fed [is] late, the ECB [is] late, this is a recession and those, like me, that believe that we don’t have the imbalances in the economy, and this will actually spur further upside.”

— Sam Meredith

Strategists at Mizuho International expect the European Central Bank to cut interest rates by 25 basis points on Thursday, reducing the deposit rate to 3.5% from 3.75%, followed by two further rate cuts before year-end.

Evelyne Gomez-Liechti, a rates strategist at Mizuho International, said in a research note that markets are split between 50 basis points or 75 basis points of cuts from the ECB through to the end of 2024. A basis point is 0.01 percentage point.

“September and December are fully priced. Our base case is for the ECB to cut in the last three meetings of the year, and we think there is room for the October meeting to be priced more evenly, making receiving positions still attractive,” Gomez-Liechti said.

Separately, economists at Berenberg Bank have said they expect the ECB to pause when policymakers meet on Oct. 17, before reducing rates by another quarter-point on Dec. 12.

— Sam Meredith

European markets opened sharply higher on Thursday, as investors keenly await the European Central Bank’s monetary policy meeting.

The pan-European Stoxx 600 traded up more than 1.1% higher shortly after the opening bell, with all sectors in positive territory.

— Sam Meredith

The European Central Bank will be wary of a flurry of risks surrounding the growth outlook, one economist at S&P Global Ratings said on Thursday, including shipping costs, energy policy and international trade.

“They have many risks surrounding the outlook,” Sylvain Broyer, chief economist for EMEA at S&P Global Ratings, told CNBC’s “Squawk Box Europe” on Thursday.

“The ECB is focused on what is happening on the labor market because right now the labor market is still tight, so that service inflation has reaccelerated over the summer, and this is because labor costs are not easing as quickly as many were expecting,” Broyer said.

“It’s really a balancing act for the ECB to focus on the labor market, on the one side, the inflation risks associated with a tight labor market but, on the other side, the risk of a reversal and then much weaker growth if labor costs become the problem for employers,” he added.

— Sam Meredith

The European Central Bank is poised to deliver a quarter-point rate cut on Thursday, according to an economist at Goldman Sachs, but guiding the market on what to expect over the coming months is likely to be a tougher challenge.

“I think the first part of the meeting, if you like, is relatively straightforward. They will cut [by] 25 basis points. They will probably just make small changes to the projections, and they will say we are data dependent, we go meeting by meeting. I think that’s the easy part,” Jari Stehn, chief European economist at Goldman Sachs, told CNBC’s “Squawk Box Europe” on Thursday.

“The harder part, I think, is going to be in the press conference to guide the market in terms of what the timing is of that next rate reduction. And here, we think [ECB President Christine Lagarde] will leave relatively open.”

Stehn said he expects the ECB to downwardly revise its near-term growth projections, “but I think they will hold on to the broad narrative of a recovery going on in Europe.”

— Sam Meredith

A “moderate” interest rate cut would be the appropriate course of action for the European Central Bank, according to UBS CEO Sergio Ermotti.

His comments ahead of the ECB’s highly anticipated meeting on Thursday, with analysts suggesting that the most likely outcome is for policymakers at the central bank to deliver a quarter-point rate cut.

When asked for his views on the appropriate course of action for the ECB, Ermotti replied, “I guess a moderate cut.”

“There is room for the ECB and, in general, the central banks as I said before to maybe to do some cuts, but the scope and size of those cuts have to be coherent with the first mandate, [which] is the fight of inflation and eventually [to] stimulate the economy,” Ermotti told CNBC’s “Squawk Box Asia.”

The ECB, which sets monetary policy for the 20 nations that share the euro, held interest rates steady at 3.75% in July.

— Sam Meredith

The big question for many market participants on Thursday is not whether the European Central Bank will cut interest rates — but what comes next.

“I think that it is broad consensus not only among economists but also in the [ECB’s governing] council that there will be a rate cut of 25 basis points. The big question is what signals will be sent,” Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, told CNBC’s “Squawk Box Europe” on Wednesday.

“It is a tricky situation because you have this core inflation which will go up in September, according to our inflation [forecast], to 3.2%. You have also the view of Philip Lane, the chief economist of the ECB, that wage increases will be higher over the second half of this year.”

Hamburg Commercial Bank’s De la Rubia said he was “quite skeptical” further interest rate reductions would follow a September cut.

“It is an environment where it is difficult to argue, ‘OK, now let’s move on with further steps.’ So, I think they will stick to their meeting-to-meeting approach and be quite cautious,” De la Rubia said.

— Sam Meredith

The European Central Bank on Thursday is set to cut rates again by 25 basis points just days ahead of the U.S. Federal Reserve beginning its own rate-cutting cycle.

Traders are widely anticipating an interest rate cut at the Federal Reserve’s Sept. 17-18 meeting, as well as at the ECB’s meeting this week.

In July, the ECB left interest rates unchanged in a unanimous vote following June’s landmark cut. At the time it described the potential for a September reduction as “wide open.”

The ECB’s key interest rate — which helps to price all sorts of loans and mortgages across the bloc — is currently at 3.75% after years of aggressive hikes.

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— Annette Weisbach