Bets on ECB Rate Cut in October Increase Following Weak Inflation Data from France and Spain

Traders have increased their expectations that the European Central Bank (ECB) will implement another interest rate cut next month, following inflation figures from France and Spain that were weaker than anticipated.

In France, annual consumer price inflation fell to 1.2% in September, down from 1.8% in August and below economists’ predictions of 1.6%. Similarly, Spain saw its inflation rate drop to 1.5% from 2.3%, also coming in under the expected 1.9%.

Compounding concerns, the unemployment rate in Germany, the largest economy in the eurozone, rose more than anticipated in September, raising fears that the nation may have already entered a recession. Additionally, a separate measure of eurozone sentiment declined more than expected, with price expectations also easing.

The likelihood of a 0.25% rate cut by the ECB at its upcoming meeting in October has surged to around 78%, up from about 20% just a week prior, according to reports.

In response to these developments, benchmark German 10-year government bond yields have fallen, while the euro has weakened.

Analysts at ABN Amro indicated in a note to clients that the economic outlook for the eurozone is becoming increasingly bleak, which may compel the ECB to lower interest rates despite recent wage increases. They consider an October rate cut to be their “base case.”

The analysts warned, “The eurozone recovery is in danger of stalling, if it has not already. If weak demand persists, businesses may begin to cut jobs more significantly, heightening the risk of an economic downturn.”

Earlier this month, the ECB reduced borrowing costs for the second time in three months. However, in a press conference following that decision, ECB President Christine Lagarde emphasized that the central bank is not “committed” to any specific rate path and will remain data-driven in its future policy decisions.