European Central Bank set for third interest rate cut of the year in meeting this week

The European Central Bank is on course to deliver its third interest rate cut of the year at its meeting this Thursday, as policymakers say inflation risks are easing faster than previously expected.

Headline price rises in the euro area cooled to 1.8% in September, below the central bank's 2% target. Core inflation, which strips out the more volatile components of energy, food, alcohol and tobacco, hit a two-and-a-half year low of 2.7%.

Those figures have broadly continued to fall even after the ECB cut interest rates by 25 basis points in June, and again by the same amount in September, with the central bank taking its key rate — the deposit facility — from a record high of 4% down to 3.5% across the two sessions.

As of Monday morning, money markets had priced in not only another 25-basis-point reduction during the October meeting, but also a follow-up cut to 3% at its next and final gathering of the year in December.

Expectations for faster monetary easing have built since the ECB's Sept. 12 meeting, amid a series of dovish comments from officials and cooler-than-expected inflation prints from euro area states, including Germany. Bank of France Governor Francois Villeroy de Galhau last week described an October rate cut as "very likely" and said such a step "won't be the last."

"Victory against inflation is in sight," Villeroy told radio station France Info, noting that some volatility and upticks in the headline rate could follow.

ECB President Christine Lagarde told European Union parliamentarians late last month that the latest developments had strengthened the central bank's "confidence that inflation will return to target in a timely manner," and said this would be taken into account in October. Analysts at Citi