ECB momentum for an October rate cut is looking unstoppable
The Costs Set European Be Will On Central 17 October Bank Borrowing
An interest-rate cut that European Central Bank officials deemed unlikely just three weeks ago now seems a near certainty when they next set borrowing costs on October 17.
Markedly souring business surveys, the first below-2% inflation reading in more than three years and the reassurance offered by the US Federal Reserve’s own shift to easing have all brought policymakers toward the point where a quarter-point reduction appears to need little more than a formal sign-off.
The clear-cut perception of this month’s decision is such that investors are now pricing a 90% chance of it transpiring. Economists who were previously united in predicting only a December move have changed their views en masse, with forecasters at Morgan Stanley and Barclays among those doing so earlier this week.
“We will discuss and decide when we meet next time, and will get more information until then, but recent data clearly point in the direction of a cut,” Latvian central bank chief Martins Kazaks said.
“The risks to the economy have become more pronounced and the risks of still sticky domestic, especially services, inflation and too-weak growth are increasingly balanced.” The turnaround is remarkable given how policymakers sought a far more elaborate tapestry of evidence to justify the two cuts they delivered since June, in tune with what they insist is a data-dependent approach. They also favoured sticking to a quarterly tempo of easing to match their forecasting schedule.
In contrast to their September meeting, when two inflation readings and a gross domestic product report were available, this time the Governing Council would be content to act on just one consumer-price report, a selection of sentiment indexes and whatever patchy evidence on wages it can glean.
Even so — and even before data showed inflation of just 1.8% in the euro zone last month, noticeably lower than the 2% target — ECB President Christine Lagarde was ready on Monday to acknowledge the momentum gathering toward another easing move.
“The latest developments strengthen our confidence that inflation will return to target in a timely manner,” she told European Union lawmakers. “We will take that into account in our next monetary-policy meeting.”
On September 12, officials judged a rate cut this month to be a contingency option rather than anything likely to materialise. A smaller-than-usual gap of just five weeks between decisions provided another reason to wait.
But it’s become apparent that the economy is struggling to grow. Business surveys last week by S&P Global revealed a much weaker-than-expected performance, which then stoked bets of an imminent cut in borrowing costs.
“Literally every leading indicator for inflation has decreased since the last ECB meeting,” Morgan Stanley economists led by Jens Eisenschmidt wrote on Monday. “And the euro-area economy looks significantly weaker. In that environment, the risk assessment for another cut looks straightforward.” While dangers remain, the economic revival in the euro area is likely to gain momentum, ECB Vice President Luis de Guindos said on Wednesday.