By Balazs Koranyi
Recent data reveals that inflation has eased more than expected in France and Spain, two of the euro zone's largest economies. Additionally, the German job market has shown signs of cooling. These developments have bolstered the case for the European Central Bank (ECB) to further reduce borrowing costs in the near future.
The euro zone economy has been teetering on the edge of recession for much of the year, with price pressures decreasing more than anticipated in recent months. This has led to calls for the ECB to take more decisive action to support the struggling economy.
While the ECB has been hesitant to implement faster policy easing due to concerns about wage growth and services inflation, lower-than-expected inflation readings from France and Spain challenge this stance. French inflation dropped to 1.5% in September from 2.2%, below the expected 2.0%, while Spanish inflation eased to 1.7% from 2.4%, falling short of the anticipated 1.9%.
Consumer price growth expectations for the next 12 months have also decreased significantly, indicating a lack of confidence in future inflation levels. This, coupled with a decline in a key euro zone sentiment indicator, suggests that inflation could fall well below the ECB's 2% target, prompting speculation of accelerated policy easing.
Investors have responded by increasing their bets on another rate cut on Oct. 17, with the likelihood of a move now at approximately 75%. This shift in expectations comes after the ECB cut rates in June and September, with projections showing inflation returning to the 2% target only in late 2021.
Policy doves within the ECB are now advocating for a rate cut in light of the deteriorating economic conditions, fearing that the economy may cool too rapidly and inflation could remain below target for an extended period. While some more conservative policymakers prefer quarterly cuts to align with data releases, others argue that quick action is necessary given the current economic climate.
Economists from institutions like BNP Paribas and HSBC have adjusted their forecasts to predict an October rate cut, emphasizing the need for the ECB to intensify its easing measures. Data from Germany, the largest economy in the euro zone, further supports the case for a rate cut, as the number of unemployed individuals rose more than expected in September, raising concerns of a potential recession.
Analysis:
The recent data indicating a slowdown in inflation and weakening job markets in key euro zone economies has heightened expectations for the ECB to implement a rate cut. This move is seen as necessary to stimulate economic growth, prevent a prolonged period of low inflation, and address the looming threat of recession. For investors, this development may present opportunities to adjust their portfolios in anticipation of potential market shifts resulting from the ECB's policy decisions.
