MNI SOURCES: ECB Heads For 25BP Cut; Risks From Trump, Germany
MNI (LONDON) - A 25-basis-point cut by the European Central Bank next month looks almost assured after a push by some officials for 50 failed to gain momentum, with the ECB likely also to retain its meeting-by-meeting approach as it weighs significant risks from U.S. trade policy and a sickly German economy, Eurosystem officials told MNI.
Barring surprises, conditions in the euro area indicate the need for a third consecutive rate cut to continue easing monetary restriction, sources said, with the ECB likely to continue cutting in this cycle at least until the top of the range of estimates of the neutral level from 2-2.5%.
As neutral gets closer, the ECB may become more tentative, officials said, with one saying that beyond another cut in January it was difficult to predict the rate path with precision.
“January I would say is likely depending on whether the projections confirm that we are still on the right track and downside risks to inflation become more present. Beyond that it seems to me to be too much speculation,” the source said. “It seems to me that the assumption of cutting at every meeting is a bit adventurous. … I am comfortable with reducing the level of tightening until we get to an approximation of the neutral rate and then assess and decide.” (See MNI SOURCES: ECB Officials See Rate Expectations As Stretched)
TARIFF CONCERNS
While officials are wary of a potential inflationary impulse from a tit-for-tat tariff war if incoming U.S. President Donald Trump acts on his election promises on trade, they are also conscious of the deflationary consequences of such a scenario, particularly if Chinese goods are diverted to Europe. (See MNI INTERVIEW2: Trump Stagflationary For Eurozone-ECB's Wunsch)
While tariffs will be inflationary to the eurozone’s U.S. trade, the ECB is aware there could be an opposite effect from China looking to displace trade. While a weaker euro could weigh on imported deflation, the ECB does not target the exchange rate, and officials calculate that it would have to fall close to parity to make much difference to projections.
A slowing Chinese economy after being hit by U.S. tariffs could also depress the price of oil, providing an additional inflationary impulse.
ECB policymakers expect December’s projections to begin reflecting some market reactions to the U.S. election, with the data cutoff set for slightly after Nov 20. The impact may still be unclear by the March projections, however, depending on how swiftly the new U.S. government implements its policies.
Concerns though are already building about growth, particularly in Germany, whose problems have now been compounded by the collapse of the government. Officials are also becoming concerned about whether rising defaults might erode the quality of German banks’ balance sheets, reducing their capacity to lend.
SERVICES PRICES
Still-sticky services inflation, is however clipping the wings of some of the more aggressive dovish arguments, and helping to ensure that the central bank does not accelerate its easing in December.
“A 50bp cut would be overreacting and isn’t warranted at the moment,” one official remarked, noting that even those advocating for a larger reduction base their arguments on potential downside surprises in growth and inflation in the December projections, which have yet to materialise.
However, another official open to 50bp argued that it should remain an option for December, if pre-meeting inflation data underperforms and growth and inflation projections see a downward revision.
“I would also prefer incremental 25bp cuts, but the risk of undershooting is real, and the labour market could easily follow the weaker consumption trends. An undershooting scenario is plausible,” the official said, adding that maintaining a restrictive stance wouldn’t align with a negative output gap.
An ECB spokesperson declined to comment.