ECB to cut interest rate in October, economists predict

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A recent string of indicators pointing to the Eurozone’s slowing growth will probably lead to a 0.25 per cent interest rate cut by the European Central Bank next month, economists predict.

The long-standing consensus among economists until this week was that the ECB would wait at least until December before deciding on a further rate cut, after two such moves in June and September brought down the key deposit rate to 3.5 per cent.

But weak inflation data in France and Spain combined with an unexpectedly low Purchasing Managers’ index (PMI) for the Eurozone this week changed that general-held view, with many economists now expecting a rate cut in October.

“I expect the ECB to move its focus from inflation to growth risks,” Piet Haines Christiansen at Danske Bank wrote in a note to clients late on Friday when he updated his view, adding that the data was “simply too weak to not change the October meeting outlook”.

Economists at Goldman Sachs, JPMorgan, BNP Paribas and T Rowe Price on Friday also revised their forecast to say that an October cut was likely.

Bond prices, which at the start of the week pointed to a 40 per cent probability of a rate reduction at the next ECB meeting on October 18, on Friday priced in a 80 per cent likelihood, according to Bloomberg data.

The Eurozone PMI on Monday for the first time since February crashed below the crucial level of 50 when it unexpectedly sank to 48.9 from 51 in August, pointing to a sharp contraction in business activity.

The PMI data would be a “wake-up call” for the ECB, BNP Paribas’s chief European economist Paul Hollingsworth wrote in a note to clients predicting rate cuts both in October and December. The ECB would act on “a material risk that the Eurozone’s economic recovery will falter before it even has a chance to get properly going”, he explained.

In December, the ECB will update its own economic forecasts for inflation and growth, which the bank’s officials have long seen as a preferred basis for decision taking.

After the September cut, ECB president Christine Lagarde reiterated that the central bank was “not pre-committing” to further rate reductions, stressing that policymakers will stick to their “data-dependent and meeting-by-meeting approach” and assess all available indicators with an open mind.

A presentation by Isabel Schnabel, one of the ECB’s executive board members who is reluctant to endorse fast rate cuts, on Thursday suggested a possible shift in their stance: “Inflation expectations of firms and households have come down significantly,” one of her slides states. In a different speech a week earlier, she stated that “inflation perceptions remain high, making expectations more fragile to new shocks”.

Citi economist Christian Schulz said that the new wording suggested a “noticeable” change in sentiment.

A different member of the governing council told the Financial Times last week that the most recent economic data “seems to confirm the downside risks” while “disinflation was on track”. While this policymaker did not want to commit to their voting behaviour in October, “you can read between the lines”, they added.

For Tomasz Wieladek, an economist at T Rowe Price, “the more important is what is going to happen” after the October cut, he told the FT. Will the the ECB return to its pace seen since June, when it cut rates every other meeting, or will it act more quickly?

A lot hinges on the outcome of the US presidential election, argues Wieladek. Should Donald Trump win the November vote, increasing geopolitical uncertainty, such as the prospect of a trade war, “I believe the ECB will cut on every meeting until we get to 2 per cent”, Wieladek said.

If Kamala Harris is elected next US president, he expects that the easing will be slower. “The October move is likely to be an insurance cut” rather than a signal that the ECB will move faster from now on.

Additional reporting by Philip Stafford in London