Weak Euro Zone Data Reinforces Calls for ECB Rate Cut

By Balazs Koranyi

FRANKFURT – Inflation has decreased more than anticipated in two of the largest economies in the euro zone, while the German job market has shown signs of further cooling this month. This development bolsters the case for the European Central Bank (ECB) to reduce borrowing costs in its upcoming meeting.

Throughout this year, the euro zone economy has been teetering on the brink of recession, with inflationary pressures easing more than expected in recent months. This has led to arguments suggesting that the ECB may not be providing adequate support to a struggling economy.

The ECB has resisted calls for quicker policy adjustments, citing concerns over persistent wage growth and elevated services inflation. However, lower-than-expected inflation figures from France and Spain underscored a challenge to this stance.

In September, French inflation decreased to 1.5% from 2.2%, falling short of the projected 2.0%. Similarly, Spanish inflation dropped to 1.7% from 2.4%, missing expectations of 1.9%, as service prices moderated and energy prices declined.

Additionally, separate data on consumers’ price expectations indicated a reduction in their inflation outlook for the next year, reaching the lowest level since September 2021. This data adds to previous reports that paint a gloomy picture of economic growth, including a significant drop in a key euro zone sentiment indicator, which also revealed decreasing price expectations.

These developments suggest that inflation in the euro zone could fall significantly below the ECB’s 2% target this month, intensifying speculation about a potential acceleration in policy easing. Following the data release, investors increased their expectations for another rate cut on October 17, with probabilities now estimated at about 75%, compared to approximately 25% the previous week.

The ECB had previously cut rates in June and September, and a rate reduction on October 17 had seemed unlikely until recently, as the ECB’s forecasts indicated inflation would not sustainably return to the 2% target until late next year.

Sources close to the discussions have indicated that a rate cut should now be considered, as more dovish policymakers express concerns that the economy may be deteriorating too quickly, leading to below-target inflation becoming a persistent issue. On the other hand, more conservative, or hawkish, policymakers believe that quarterly cuts are preferable, as substantial data on wages, employment, and growth is only available every three months, alongside the ECB’s new economic projections.

Moreover, there are fears that inflation might rise again toward the end of the year, making premature cuts while inflation trends upward a potentially misguided move.

Carsten Brzeski, an economist at ING, highlighted that when economic indicators—both leading and lagging—indicate weak growth and faster disinflation, it positions the ECB doves favorably in discussions.

Additional pressure has mounted on the ECB from economists, with several banks adjusting their forecasts to anticipate a rate cut in October.

In Germany, the euro zone’s largest economy, employment figures showed a larger-than-expected rise in unemployment in September, intensifying concerns that the country may already be in recession. Germany’s economy has contracted in two of the last three quarters, and its central bank has suggested that further negative growth could occur in light of a significant industrial downturn.