Mounting Evidence of Eurozone Weakness Bolsters Case for ECB Rate Cut

The case for an interest rate cut by the European Central Bank (ECB) is gaining momentum as recent economic data reveals a weakening Eurozone economy and rapidly cooling inflation. Investor expectations for a rate cut at the ECB’s October 17th meeting have surged, with recent data adding to the growing chorus of voices urging the central bank to act swiftly to support growth.

Inflation in France and Spain, two of the Eurozone’s largest economies, has eased more sharply than anticipated in September. French inflation slowed to 1.5%, significantly below the expected 2.0%, while Spanish inflation fell to 1.7%, undershooting forecasts of 1.9%. This deceleration in price growth comes as services inflation eases and energy prices decline.

Further weakening the case for maintaining the current interest rate, data from Germany, the Eurozone’s largest economy, revealed a larger-than-expected rise in unemployment in September. This adds to concerns that Germany, a key driver of the bloc’s economy, is already in recession after experiencing two consecutive quarters of contraction.

Adding to the gloomy outlook, a key eurozone sentiment indicator has dropped more than anticipated, reflecting growing pessimism about the economic outlook. Consumer expectations for inflation over the next 12 months have also fallen to their lowest point since September 2021.

These data points suggest that eurozone inflation could fall significantly below the ECB’s 2% target this month, prompting some economists, including those at BNP Paribas, HSBC, Deutsche Bank, and Societe Generale, to revise their forecasts and predict a rate cut in October.

While the ECB had previously resisted calls for faster policy easing, arguing that wage growth and services inflation remained too high, the recent string of disappointing data has shifted the debate. “Dovish” policymakers within the ECB are likely to push for a rate cut, fearing that the economic slowdown is accelerating and inflation could undershoot the target for an extended period.

Key Takeaways:

• Recent economic data from major Eurozone economies points towards a weakening economy and cooling inflation.
• Inflation in France and Spain has eased more than expected, and German unemployment has risen more than anticipated.
• Eurozone sentiment indicators have declined, and consumer inflation expectations have fallen.
• Investors have increased their bets on an ECB rate cut in October, with current expectations exceeding 75%.
• Economists are urging the ECB to accelerate policy easing to support the slowing economy.

The ECB faces a critical decision at its upcoming meeting. The latest economic data strongly suggests that a rate cut is warranted to address the growing risks of a deeper economic downturn and persistently low inflation. The central bank’s ability to balance these concerns and provide appropriate policy support will be crucial for the Eurozone’s economic recovery.