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Will the European Central Bank opt for a big rate cut in December?

2024-10-26 13:34:16Biznes SHKRUAR NGA REDAKSIA VOX

Will the European Central Bank opt for a big rate cut in December?

Market participants have raised their expectations that the European Central Bank (ECB) will take a major step with the next interest rate move, following weak indicators of business activity on Thursday. Money markets are now pricing in a 50% chance the bank will cut interest rates by half a percentage point in December. Meanwhile, ECB officials are divided on the necessity of such a large reduction.

Key European government bond yields fell sharply after weak October business activity readings in the manufacturing and services sectors on Thursday. Movements in bond yields typically reflect expectations of the ECB's interest rate trajectory, particularly for short-term instruments. The yield on two-year German and French government bonds, which are highly sensitive to changes in interest rates, fell to annual lows before recovering, indicating traders have increased their bets on a further cut. rate increase from the central bank.

According to S&P Global flash estimates, the manufacturing purchasing managers' index (PMI) for both France and Germany contracted for more than two years in October, although Germany's reading improved. France's services PMI is expected to fall back into contraction after two months of growth, suggesting the boost from the Paris Olympics was temporary. These data, along with a sharp drop in headline inflation in September, have significantly increased the odds that the ECB will deliver a further rate cut in December, after back-to-back cuts in September and October, the first such moves in 13 years.

Annual eurozone inflation fell to 1.8% in September, its lowest level in three years and below the ECB's 2% target. However, the core CPI, which excludes volatile items such as food, energy, alcohol and tobacco, remained relatively high at 2.7%. As such, the upcoming consumer price index for October, due next week, will be decisive for market sentiment.

ECB officials are split on whether to implement a quarter or half percentage point cut, but all have expressed confidence that inflation will return to target. ECB President Christine Lagarde said in an interview with Bloomberg TV: "The pace will be determined based on backward-looking and forward-looking elements, using our three criteria and applying judgment."

In addition to inflation data, major eurozone economies will release their third-quarter Gross Domestic Product (GDP) figures next week, which will provide further insight into the region's economic trajectory. The IMF has cut the eurozone's economic outlook to just 0.8% in 2024 and 1.2% in 2025, down 0.1% and 0.3% from its forecast in July.


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