MNI ECB WATCH: ECB Likely To Cut, Remain Data Dependent
MNI (ROME) - The European Central Bank is widely expected to lower its deposit rate by 25 basis points to 3.25% on Thursday, in a second consecutive cut following weaker-than-expected inflation figures and disappointing September PMI data. (See MNI SOURCES: Chances Of October ECB Cut At Least 50-50)
This would be the first cut in the current easing cycle made at a meeting without fresh economic projections, following a significant shift in market sentiment over the past few weeks towards anticipating additional easing.
Concerns over weak economic growth are mounting within the ECB, though policymakers remain cautious about admitting a major shift in the balance of risks, citing relatively small deviations from projections and no signs of full-blown recession. Middle East tensions are adding to uncertainty, sources have told MNI.
But, even as it is likely to cut, the ECB is set to maintain its meeting-by-meeting approach, leaving December’s decision open. (See MNI SOURCES: ECB To Keep Meeting-By-Meeting Even After Oct Cut)
Public comments by several national central bank governors have added to expectations for an October cut. Bank of France Governor Francois Villeroy de Galhau has described a reduction as "very likely," while the Bundesbank’s Joachim Nagel indicated he was “open to considering another interest rate cut.” Martins Kazaks of the Bank of Latvia also backed a cut in October. (See MNI INTERVIEW: ECB Should Cut In October, Says Kazaks)
In contrast, few hawkish voices have openly opposed further easing in October, with only Austria’s Robert Holzmann firmly against. Most hawkish rhetoric has focused on leaving December "fully open" regardless of Thursday’s decision. (See MNI INTERVIEW: Risk ECB Undershoots Inflation Not High -Vujcic)
Geopolitical developments, particularly rising tensions in the Middle East and their potential effect on energy prices, are likely to influence the ECB’s language, injecting fresh uncertainty after a period during which policymakers had been more confident in their projections.