Exclusive-ECB doves will push for a rate cut in October, digging hawks

By Francesco Canepa and Balazs Koranyi

FRANKFURT (Reuters) – Policy doves at the European Central Bank are preparing to fight for an interest rate cut next month after a string of weaker-than-expected economic data, a move that could face resistance from their more conservative colleagues, have stated seven sources. Reuters.

ECB policymakers saw an October 17 rate cut as quite unlikely after cutting borrowing costs this month, amid weaker growth forecasts and expectations of a continued, albeit bumpy, fall in inflation this year following.

However, disappointing eurozone business surveys and German sentiment data, as well as a bigger-than-expected slowdown in wages, encouraged policymakers who favor lower rates – or doves in market parlance – to push for a reduction, the sources said.

Energy costs have also fallen in recent weeks, and some market indicators now point to the risk of the bank overshooting its inflation target for an extended period.

However, any effort to cut rates again will face vigorous opposition from so-called hawks, who argue that surveys often paint a bleaker picture than hard data such as GDP numbers, the sources added.

Some sources have proposed a compromise where rates are kept on hold in October, but there is a strong hint of a possible cut in December if the data does not improve. But this would contradict the ECB’s “meet-by-meet” approach.

An ECB spokesman declined to comment on the matter.

With the Oct. 17 decision three weeks away and key data such as September inflation not due until next week, the decision remains wide open and some swing voters still undecided, the sources said.

Policymakers have long argued that the focus should be on hard data, such as wages and GDP figures, as well as the ECB’s own projections, all of which only become available for the December meeting.

While few policymakers went so far as to rule out an October interest rate cut in private conversations, Slovakia’s Peter Kazimir said publicly that the ECB would “almost certainly” have to wait until December.

Traders increased their bets on an October rate cut after recent weak data. Money market prices now place a 50-60% chance of the ECB cutting its deposit rate by 25 basis points to 3.25%, down from a 35% chance a week ago.

“Overall, September PMI (Purchasing Manager Index) data suggest that the eurozone’s economic recovery rests on shaky foundations, which, combined with softer price pressures, are likely to see ECB doves increasingly talking to on the need to offer another cut in October,” said Paul Hollingsworth, chief economist for Europe at BNP Paribas (OTC:).

Economists at HSBC said they expected the ECB to cut interest rates by 25 basis points at each meeting from October to April next year, while Societe Generale ( OTC: ) economist Anatoli Annenkov said there was a case for early interest reductions.