AN INTEREST rate cut that European Central Bank (ECB) officials deemed unlikely just three weeks ago now seems a near certainty when they next set borrowing costs on Oct 17.
Markedly souring business surveys, the first below 2 per cent 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 towards 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 per cent 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 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 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 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.
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Even so – and even before data showed inflation of just 1.8 per cent in the eurozone last month, noticeably lower than the 2 per cent target – ECB president Christine Lagarde was ready on Monday (Sep 30) to acknowledge the momentum gathering towards 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 Sep 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.”
Meanwhile, how policymakers coalesce on the prospect of a rate cut is one question mark over the coming decision.
Speaking on Wednesday, Isabel Schnabel – considered the ECB executive board’s most hawkish member – acknowledged the dismal state of the euro-area economy and warned that officials “cannot ignore the headwinds to growth.”
ECB vice-president Luis de Guindos echoed that sentiment, saying that “Europe is in a low growth situation, and risks are to the downside”. Still, he highlighted that September inflation data were “pretty good” and a “positive surprise”.
“We have said very clearly that we are totally open, we want to keep the options open,” he said.
Other 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 cannot be taken for granted.
Slovenia’s Bostjan Vasle also spoke on Wednesday, but refused to be drawn on whether an October move could happen, while Mario Centeno of Portugal backs further easing – “speed is of the essence”.
What all officials know, however, is that the juggernaut towards 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 on 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.” BLOOMBERG
