ECB Policymaker Backs Rate Cut as Euro Zone Economy Faces Tipping Point, Reuters Reports

The European Central Bank has a "clear-cut" case for cutting interest rates at its next meeting on October 17, according to a statement from ECB policymaker Martins Kazaks, as reported by Reuters. Kazaks, Latvia's central bank governor, believes the euro zone economy may be nearing a tipping point, with risks to growth outweighing the need to further combat inflation.

Investors have already priced in a rate cut following a string of lower-than-expected inflation and growth data, as well as increasingly clear signals from ECB policymakers, including President Christine Lagarde. Kazaks cited declining wage growth, shrinking profit margins, and a subdued economic recovery across large parts of the euro zone as further evidence supporting a rate reduction.

Kazaks expressed concern that euro zone companies may start laying off workers if the prospect of an economic recovery fades, potentially triggering a snowball effect that could further dampen growth.

"If corporates start to shed labour, this snowball may start rolling," he said. "I would be very cautious about this tipping-point risk."

Despite the anticipated cut, Kazaks believes the ECB's deposit rate, even after a 25-basis-point reduction, would remain at a level that restricts economic activity and helps dampen inflation in the services sector. While he does not see the need to cut rates by a larger increment, he acknowledged that the ECB has time to make further adjustments.

The ECB's potential rate cut comes after two years of battling runaway inflation. While inflation has cooled to 1.8% in September, growth remains weak, particularly in Germany, the euro zone's manufacturing powerhouse.