Poor euro zone data flow keeps adding to case for ECB rate cut

By Balazs Koranyi

FRANKFURT (Reuters) – Inflation has eased more than expected in two of the euro zone’s biggest economies and the German jobs market has continued to cool this month, adding to an already substantial case for the European Central Bank to cut borrowing costs further next month.

The euro zone economy has been skirting recession for most of the year and price pressures have eased more than expected in recent months, fuelling arguments that the ECB has fallen behind the curve in supporting an ailing economy.

The ECB has pushed back on calls for faster policy easing on the premise that wage growth and services inflation remain uncomfortably high. But lower than predicted inflation readings out of France and Spain on Friday challenged this narrative.

French inflation has slowed to 1.5% in September from 2.2%, below expectations for 2.0%, while Spanish inflation eased to 1.7% from 2.4%, undershooting expectations for 1.9%, as services price growth eased and energy prices fell. 

Separate data on price expectations also challenged the ECB’s hesitancy as they showed consumers cutting their price growth expectations for the next 12 months to their lowest level since September 2021.

Adding to recent data that paint a gloomy picture on growth, a key euro zone sentiment indicator dropped more than expected on Friday while also showing cooling price expectations.

These figures suggest that euro zone inflation could drop well below the ECB’s 2% target this month and fuelled bets that the ECB will accelerate policy easing.

Indeed, investors raised their bets on Friday on another rate cut on Oct. 17 and have now priced in about a 75% chance of a move compared with only about a 25% chance seen last week. 

The ECB cut rates in June and September, and policymakers had seen an Oct. 17 rate cut as rather unlikely until a recent string of disappointing data, since ECB projections show inflation back at the 2% target on a durable basis only late next year. 

DOVES TO SEEK RATE CUT

But sources close to the discussion said a cut must be on the table now and policy doves will be pushing for one out of fear that the economy is cooling too quickly and inflation could undershoot the target on a more persistent basis. 

More conservative policymakers, or hawks in central bank jargon, have said quarterly cuts are more appropriate because hard data on wages, employment and growth only come every three months, as do the ECB’s new projections. 

Another issue is that inflation is likely to tick up towards the end of the year and making quick cuts while inflation is accelerating would be a bad signal to send.

“When leading indicators like this week’s PMIs and Ifo index as well as lagging indicators like today’s German labour market data and actual inflation data out of France and Spain all point to weak growth and faster disinflation, ECB doves will clearly be flying high,” ING economist Carsten Brzeski said.

Economists have also piled pressure on the ECB. BNP Paribas (OTC:BNPQY) and HSBC changed their calls to predict an October move while Deutsche Bank and Societe Generale (OTC:SCGLY) both said the ECB needs to accelerate easing. 

Adding to the rate cut case, data out of Germany, the bloc’s biggest economy, showed that the number of people out of work rose more than expected in September, adding to fears that the country was already in recession.

Germany’s economy has shrunk in two of the last three quarters and the Bundesbank, its central bank, has already said another negative reading was possible given a deep industrial recession.