Economists are now anticipating a 0.25% rate cut by the European Central Bank (ECB) in October, shifting their previous expectations of a December adjustment. Recent economic data, including weak inflation numbers from France and Spain and a decline in the Purchasing Managersâ Index (PMI), has heightened concerns about the Eurozoneâs economic health.
The PMI, which fell to 48.9 in September from 51 in August, signals the first contraction in business activity since February. This is seen as a red flag for the ECB, with markets responding by showing an 80% chance of a rate cut at the October 18 meeting.
Weak economic data shifts forecasts
The outlook for ECB monetary policy has been revised in light of weaker-than-expected economic indicators. The central bank implemented rate cuts in June and September, reducing the critical deposit rate to 3.5%. With the Eurozone PMI falling below 50, economists from institutions such as Goldman Sachs, JPMorgan, and BNP Paribas have updated their forecasts.
Piet Haines Christiansen of Danske Bank remarked that the data is too weak to ignore. He suggests that the ECB will shift its focus from inflation concerns to the risks associated with slowing growth. Paul Hollingsworth, chief European economist at BNP Paribas, echoed this sentiment, warning that further delays in cutting rates could put the Eurozoneâs economic recovery at risk.
ECBâs data-dependent approach faces pressure
The European Central Bank has maintained a cautious stance, with President Christine Lagarde emphasizing a data-driven approach to decision-making. However, pressure is building for the ECB to act sooner rather than later. Recent comments from ECB executive board member Isabel Schnabel highlighted that inflation expectations among businesses and households have significantly declined.
Schnabelâs latest remarks contrast her earlier stance, where she pointed out that inflation perceptions remained high. As sentiment shifts, other ECB officials have acknowledged that the risk of disinflation is becoming more prominent. One official, speaking anonymously, confirmed that the data points to downside risks, signaling that a rate cut could be necessary.
Potential for further cuts
Economists are also speculating on the ECBâs potential course of action beyond October. Tomasz Wieladek from T Rowe Price has suggested that the outcome of the upcoming U.S. presidential election in November could significantly impact the ECBâs future decisions. He predicts that if Donald Trump wins, the geopolitical uncertainty could lead to further rate cuts, potentially increasing the deposit rate to 2%.
Bond markets have already responded to the shifting expectations, with the probability of an October rate cut climbing from 40% to 80% within the week. Although the ECB has not yet confirmed its course of action, all signs indicate that the central bank will have to take further steps to address the growing economic concerns in the Eurozone.
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