Weak eurozone data flow continues to make case for ECB rate cut Reuters

By Balazs Koranyi

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

The eurozone economy has been out of recession for most of the year and price pressures have eased more than expected in recent months, fueling arguments that the ECB has fallen behind the curve in supporting a struggling economy.

The ECB rejected calls for faster policy easing on the premise that wage growth and services inflation remain uncomfortably high. But lower-than-forecast inflation readings in France and Spain challenged that narrative on Friday.

French inflation fell to 1.5% in September from 2.2%, below expectations for 2.0%, while Spanish inflation fell to 1.7% from 2.4%, below expectations of 1 .9% as service price growth slowed and energy prices fell.

Separate data on price expectations also caused the ECB to hesitate as it showed consumers cutting their expectations for price rises over the next 12 months to the lowest level since September 2021.

Adding to recent data painting a bleak picture for growth, a key gauge of euro zone sentiment fell more than expected on Friday, while also pointing to a drop in price expectations.

The figures suggest eurozone inflation could fall well below the ECB’s 2% target this month and fueled bets the ECB will accelerate policy easing.

Indeed, investors increased their bets on Friday for another rate cut on October 17 and now rate a roughly 75% chance of a move, compared to just a 25% chance seen last week.

The ECB cut rates in June and September, and policymakers had seen an October 17 rate cut as fairly unlikely until a recent string of disappointing data, as ECB forecasts showed inflation returning to its 2% target on a sustainable basis only at the end of next year.

FALL OUT TO LOOK FOR THE RATE CUT

But sources close to the discussion said a cut must now be on the table, and policy doves will push for one over fears the economy is cooling too quickly and inflation could run below target on a more persistent basis.

More conservative policymakers, or hawks in central bank jargon, said quarterly cuts were more appropriate because solid data on wages, employment and growth come only every three months, as do new ECB forecasts.

Another problem is that inflation is likely to rise towards the end of the year, and making rapid cuts while inflation is accelerating would be a bad signal to send.

“While leading indicators such as this week’s PMI and Ifo, as well as lagging indicators such as today’s German labor market data and actual inflation data from France and Spain, all point to an increase weak and faster disinflation, the ECB doves will clearly fly high,” ING economist Carsten Brzeski said.

Economists also put pressure on the ECB. BNP Paribas (OTC: ) and HSBC switched calls to predict a move in October, while Deutsche Bank and Societe Generale (OTC: ) both said the ECB needs to accelerate easing.

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

Germany’s economy has shrunk in two of the past three quarters, and the Bundesbank, its central bank, has already reported another negative reading amid a deep industrial recession.