An already strong argument for the European Central Bank to significantly reduce borrowing costs next month is strengthened by the fact that inflation has decreased more than anticipated in two of the largest economies in the euro zone and that the German labor market has remained chilly this month.
The majority of the year has seen the euro zone economy avoid recession, and recent price pressures have eased more than anticipated, bolstering claims that the ECB is falling behind in supporting an underperforming economy.
Calls for a quicker relaxing of policy have been rebuffed by the ECB on the grounds that wage growth and service inflation are still too high. However, this narrative was called into question on Friday when inflation data from France and Spain came in lower than expected.
While Spanish inflation slipped to 1.7% from 2.4%, undershooting estimates for 1.9%, as services price growth slowed and energy costs dropped, French inflation slowed to 1.5% in September from 2.2%, behind expectations for 2.0%.The ECB’s reluctance was further tested by unrelated price expectations data, which revealed that consumers had lowered their forecasts for price growth over the next 12 months to the lowest level since September 2021.
A crucial sentiment barometer for the euro zone fell more than anticipated on Friday, adding to recent data that depicts a dismal outlook for growth and indicating a cooling of price expectations.
These numbers have fueled expectations that the ECB may quicken policy easing since they indicate that euro zone inflation may fall significantly below the bank’s 2% objective this month.In fact, investors increased their wagers on Friday over a potential rate decrease on October 17 and have now priced in a roughly 75% possibility of a move, up from merely a 25% chance the previous week.
The European Central Bank (ECB) reduced interest rates in June and September. Prior to a run of unsatisfactory data, officials had viewed a rate drop on October 17 as quite unlikely. ECB predictions indicate that inflation will only return to the 2% objective late in the next year.
DOGS TO AIM FOR A RATE CUTS
However, people with knowledge of the conversation said that a cut had to be considered right away, and those who favor policy doves will be pressing for one because they worry that the economy is cooling too quickly and that inflation may consistently fall short of the target.
Since hard statistics on wages, employment, and growth only become available every three months, as well as the ECB’s updated predictions, more conservative policymakers—referred to as hawks in the vernacular of central banks—have argued that quarterly cuts are more appropriate.
Another problem is that, as the year draws to a close, inflation is anticipated to pick up speed, and making abrupt cuts now would be a bad idea.
ING economist Carsten Brzeski predicted that “ECB doves will clearly be flying high” when “leading indicators, like this week’s PMIs and Ifo index, as well as lagging indicators, like today’s German labor market data and actual inflation data out of France and Spain, point to weak growth and faster disinflation.”
