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 likely to meet resistance from their more conservative peers, seven sources told Reuters.
ECB policymakers had seen an Oct. 17 rate cut as rather unlikely after lowering borrowing costs this month on the back of weaker growth forecasts and expectations for a continued, albeit bumpy, fall in inflation over the next year.
However, disappointing euro zone business surveys and German sentiment data, as well as a bigger-than-envisaged slowdown in wages, have emboldened policymakers who favour lower rates – or doves in market parlance – to push for a cut, the sources said.
Energy costs have also tumbled in recent weeks and some market indicators now point to a risk that the bank could undershoot its inflation target for an extended period.
Any push to cut rates again, however, will encounter vigorous opposition from so-called hawks, who argue that surveys often paint a bleaker picture than hard data such as GDP figures, the sources added.
Some sources raised a compromise solution in which rates are kept on hold in October but a strong hint is given about a likely December cut if data doesn’t improve. But this would contradict the ECB’s “meeting by meeting” approach.
An ECB spokesperson declined to comment on the matter.
With the Oct. 17 decision still three weeks away and important data such as September inflation only due to be published next week, the decision remains wide open and some swing voters have yet to make up their mind, the sources said.
Policy hawks have long argued that the emphasis should be on hard data such as wage and GDP figures, as well as the ECB’s own projections, all of which become available only for the December meeting.
While few policymakers have gone as far as ruling out an October rate cut in private conversations, Slovakia’s Peter Kazimir has publicly said the ECB will “almost surely” have to wait until December.
Traders have ramped up their bets on an October rate cut after the recent weak data. Money market prices now put a 50-60% likelihood on the ECB lowering its deposit rate by 25 basis points to 3.25%, compared to a 35% chance a week ago.
“Overall, September’s PMI (Purchasing Manager Index survey) data suggests that the euro zone’s economic recovery rests on shaky foundations, which combined with softer price pressures, is likely to see ECB doves increasingly vocal about the need to deliver another cut in October,” said Paul Hollingsworth, chief Europe economist at BNP Paribas (OTC:BNPQY).
Economists at HSBC said they expected the ECB to cut interest rates by 25 basis points at every meeting from October through to next April, while Societe Generale (OTC:SCGLY) economist Anatoli Annenkov said there was a case to front-load rate cuts.
To read the full article, Click Here