Currency watchdogs that are more inclined to take a looser line – called pigeons in monetary policy jargon – are preparing for next month’s meeting. This means they are likely to face resistance from hawks who are more oriented towards a tight line, as several insiders reported to the Reuters news agency.
In view of the declining inflation, the ECB completed the key interest rate change in June and increased it on September 12th: the deposit rate, which is crucial for the financial markets, was reduced by a quarter of a percentage point to 3.50 percent. At the same time, the ECB Council confirmed that it was not committing to a specific interest rate path. Decisions are made from session to session – and above all based on the data available. The latest economic indicators and forecasts are now painting an increasingly bleak picture of economic development, which could put the ECB under pressure to act.
Negative surprise for the financial markets
At the beginning of the week, the manager survey by the financial services provider S&P Global was published, which had a negative surprise in store for the financial markets: The euro zone economy is likely to have shrunk in September for the first time in seven months. “Overall, the Purchasing Managers’ Index data suggests that the economic recovery in the euro area is on shaky ground,” said Paul Hollingsworth, chief European economist at BNP Paribas. In his opinion, combined with easing price pressure, this could lead to the ECB doves becoming ever louder in calling for a further interest rate cut in October.
More on the topic
Interest rate turnaround: loan rates are slowly falling, Euribor could fall to two percent in 2025
Things look particularly bleak in Germany, where economic output fell more sharply in September than it did in February, according to the purchasing managers survey. In their autumn report for the federal government, the leading research institutes assume that Europe’s largest economy will also go through a recession in 2024.
Compromise?
The increasingly cloudy economic picture is giving the doves on the ECB Governing Council arguments to push for a rapid reduction, said insiders who wished to remain anonymous. In addition, energy costs have recently fallen sharply, potentially raising the risk that inflation could remain below the inflation target of two percent for a long time. According to the information, supporters of a tight line in the ECB Governing Council argue that surveys often paint a bleaker picture than hard data such as gross domestic product.
GDP in the 20 countries of the euro area rose by 0.2 percent in the spring and was therefore no longer as strong as at the beginning of the year with 0.3 percent. The ECB economists recently lowered their outlook for growth this year slightly to 0.8 percent.
The reluctant camps in the ECB Governing Council could be moving towards a compromise: interest rates would remain unchanged in October. However, the decision would be accompanied by a hint that the key interest rates could be lowered in December if the data did not improve.
However, this would contradict the ECB’s approach of making interest rate decisions on a meeting-by-meeting basis. The ECB declined to comment on the matter. Before the interest rate decision on October 17th, there is still important data that needs to be viewed by the management team. This also includes the inflation rate for September. The outcome of the interest rate decision is therefore open, said insiders.
