Policymakers at the European Central Bank (ECB) are gearing up for a debate over a potential interest rate cut, spurred by a series of weak economic data. After disappointing euro zone business surveys and a bigger-than-expected slowdown in wages, the ECB’s more dovish members are advocating for a rate cut in October. This would follow a previous reduction in borrowing costs, driven by lower growth forecasts and an anticipated decline in inflation over the next year.
Resistance from the Hawks
However, not all members of the ECB agree. The so-called hawks, who prefer to rely on hard data such as GDP and wage figures, argue that business surveys paint a more negative picture than reality. They believe that waiting until December, when the bank has more concrete data, would be more prudent.
Compromise on the Table?
Some sources have suggested a compromise: keeping rates steady in October but signaling a potential cut in December if economic conditions don’t improve. However, this would go against the ECB’s “meeting-by-meeting” approach, which emphasizes flexibility based on the most up-to-date information.
Market Reaction
Traders have adjusted their expectations in light of the weak data, now pricing in a 50-60% chance of a 25 basis point cut in October. While Slovakia’s Peter Kazimir has publicly stated that a rate cut is unlikely before December, other policymakers remain undecided. With important data, including September’s inflation figures, still to come, the debate remains open.
In the words of BNP Paribas’ Chief Europe Economist Paul Hollingsworth, “The euro zone’s economic recovery rests on shaky foundations, which combined with softer price pressures, is likely to see ECB doves increasingly vocal about the need to deliver another cut in October.”
As the October 17 meeting approaches, all eyes will be on the ECB. Whether the doves will succeed in pushing for a rate cut, or if the hawks will hold firm, remains to be seen. For now, the debate highlights the uncertainty surrounding the euro zone’s economic recovery.