ECB Doves Push for October Rate Cut Amid Economic Uncertainty and Energy Price Declines

Recent developments indicate that the European Central Bank (ECB) is under pressure from its dovish members to implement another rate cut in October, amidst growing concerns over economic growth risks. This push follows recent ECB actions, as they have already reduced interest rates twice this year. Initially, the central bank hinted that another cut in October was unlikely unless significant adverse economic events unfolded. However, the situation appears to be shifting.

Data reveals that recent business surveys and German economic sentiment have not met expectations, supporting the dovish stance advocating for further monetary easing. This sentiment is amplified by the sharp decline in energy prices, which raises fears that the ECB may be acting too slowly to prevent persistent inflation rates below the 2% target. The Bundesbank has previously forecasted a potential economic contraction in Germany in the third quarter, hinting at a technical recession.

Despite calls for immediate action, there remains resistance from hawkish ECB members. They caution that surveys could portray a gloomier economic picture than what GDP and other solid metrics suggest. A compromise may involve maintaining current rates in October while signaling potential cuts in December if economic indicators remain stagnant. This approach reflects a divergence from the ECB’s commitment to data-driven decisions at each meeting.

Given the ECB's rate decision scheduled for October 17, upcoming inflation data will play a critical role in shaping monetary policy decisions. As it stands, some officials are undecided, reflecting the fluid nature of economic conditions.

Paul Hollingsworth, Chief Europe Economist at BNP Paribas, interprets the September PMI data as evidence of an unstable economic recovery in the eurozone, coupled with diminishing price pressures. This environment may embolden ECB doves to more vocally advocate for another rate cut in October.

Market speculation about additional rate cuts has intensified, with the likelihood of an October cut rising to 80%. Analysts also anticipate that the ECB might reduce rates at both of its remaining meetings this year, on October 17 and December 12. Projections suggest a cumulative 142 basis points reduction through to June next year, implying potential 25 basis point cuts at each of the next six meetings.