ECB Momentum for an October Rate Cut Is Looking Unstoppable

Craig Stirling, Mark Schroers and Alexander Weber
4-min read

(Bloomberg) -- 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 Oct. 17.

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Markedly souring business surveys, the first below-2% inflation reading in more than three years and the reassurance offered by the 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 Plc 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 told Bloomberg in Riga. “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 favored 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 was 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.

What Bloomberg Economics Says...

“With inflation down and activity indicators heading south, we are confident the ECB will cut interest rates in October. A further rate reduction is very likely in December, with easing then set to continue through next year.”

—Jamie Rush, chief European Economist. For his EURO-AREA REACT click here

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 Sept. 12, officials judged a rate cut this month to be a contingency option rather than anything likely to materialize. 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.

Meanwhile how policymakers coalesce on the prospect of a rate cut is one question mark over the coming decision.

Hawks including Bundesbank President Joachim Nagel, Klaas Knot of the Netherlands, Austria’s Robert Holzmann and Belgium’s Pierre Wunsch, have been largely silent in recent days. While that could be a tacit sign of approval, their acquiescence can’t be taken for granted.

Another pivotal voice on the Governing Council is ECB Executive Board member Isabel Schnabel, who’s scheduled to speak later Wednesday. Slides of a presentation by her last week focused on a slowdown in the economy and were interpreted by some as a dovish signal.

What all officials know, however, is that the juggernaut toward a rate reduction looks ever harder to stop — even if they wanted to halt it in its tracks. And with only a week left until a pre-decision blackout period kicks in, the window to act is closing.

Moreover, any argument they may make against a cut would need to counter the weight of evidence consistently offered by the economic reports of the past 10 days.

“We have received further confirmation from recent statistical data that inflation is slowing down,” Bank of Finland Governor Olli Rehn said Tuesday. “This means, at least in my eyes, that there have been more grounds for lowering rates at our October meeting. The recent weakening of the euro area’s growth prospects tilts the scales in the same direction.”

--With assistance from Aaron Eglitis.

(Updates with Guindos in 12th paragraph. A previous version of this story corrected a name spelling in fourth paragraph.)

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