ECB Insight: Insiders Heavily Favour an October Cut, But Acknowledge Arguments Against It

11 October 2024

By David Barwick and Marta Vilar – FRANKFURT (Econostream) – Right off the bat, we would like to note that we stick to the view that the European Central Bank’s Governing Council is more likely than not to cut interest rates by 25bp at its monetary policy meeting next week. Too many Council members have indicated too clearly that they favour this outcome, while too few have expressed opposition or even just uncertainty.

That said, there are naturally arguments on both sides, and even some of those insiders who favour further easing on 17 October concede as much. Some of them shared their thinking with Econostream.

One governor took the view that ‘for a data-dependent decision, there isn’t much significant new data.’ Still, he made no bones about his own preference for cutting, despite being normally somewhat hawkish.

Another insider who also supported cutting readily cited potential arguments of naysayers, such as the idea that if the October cut were merely December’s brought forward (which would contradict current market expectations of cuts at both meetings), then in terms of the economic impact, a cut now or in December amounted to virtually the same thing.

‘But I think the main argument could be that you still don't see a substantial deceleration of inflation’, this person said. Moreover, as the ECB had made clear, various effects would keep inflation elevated in the final quarter of the year, he observed.

’If this higher persistence of inflation translates into inflation expectations, that could be dangerous’, he said. ‘So, one could argue that we need to wait to cut until all the base effects have washed out and we can see more clearly.’

As for the somewhat better-than-expected inflation outcome in September, this person said, those opposed to cutting in October ‘will say, “It's only the first or second surprise that we're getting in services inflation. It would make sense to wait until we have another one.”’

This insider also called into question the meaningfulness of the PMIs, noting that PMI data in the past had pointed to economic weakness, only for subsequent developments to belie them. ‘One argument against cutting in October could be that the PMIs are a very volatile measure that sometimes amplifies the weakness or strength of the economy, so we shouldn't put too much emphasis on it’, he said.

Ultimately, ‘if anyone wants to avoid a cut, they can just say that the change relative to our forecast hasn't been so massive’, this person said. ‘We’ve only had a couple of data points that are not necessarily representative of what is going to happen, so we can’t even say for sure that there is really a big change in the outlook for growth or inflation.’

Nevertheless, a risk management approach argued for an October cut, he insisted. ‘But I think a lot of people will be against it’, he added.

A third person was unimpressed by the latest inflation developments and professed to being baffled over how what he called a ‘marginal’ difference in September’s data versus expectations had ‘somehow completely changed everyone’s thinking.’

When the Council met in September, it had been clear that the next rate cut would be in December, meaning the ECB was now potentially about to perform a ‘complete reversal’, he said. ‘It could look a bit like we are in a panic’, he said. ‘I’m not convinced that we’re going to cut in October.’

Still, paradoxically or not, this governor was also clearly in favour of an October cut based on arguments related to economic weakness. ‘We need to cut’, he said. ‘At the moment, there is no good news about the economy.’

A fourth insider readily conceded that ‘the pressure to cut in October is getting higher’ but was personally still very undecided with less than two weeks to the Governing Council meeting.

‘You can make a case for cutting or not cutting’, this governor said. ‘But there haven’t been any major developments, and you’ve got oil prices rising.’

To reiterate, our view at Econostream remains that a cut is the more probable decision next Thursday. We find it telling that three of the four insiders above were strongly in favour of cutting even as they cited possible arguments of their colleagues on the opposite side of the discussion.