- Market expects a 25bp rate cut from the ECB next week, driven by weak economic sentiment and inflation falling below 2%.
- Arguments for a cut include worsening growth and inflation outlooks, with disinflationary trends and some ECB officials showing support for a cut.
- But the bank says there are valid arguments against a cut and point to the lack of new hard data since September, reliance on sentiment indicators which hasn't been very reliable, and persistent services inflation.
- ECB's cautious stance suggests there is a risk that the bank may wait until December for more updated projections before cutting rates.
- Market pressure to cut is less influential during an easing cycle, making it less likely for the ECB to act just to meet expectations.
- Outcome is uncertain, with both rate cuts and a potential hawkish surprise possible
Personally I think it'll be a very hard sell to the doves to argue against a cut after the recent batch of inflation and PMI data.
Yes, PMI data has been unreliable, but the trend has been clear.
