Van Lanschot Kempen: Unclarity about acceleration
- Rate cut correctly expected by rapidly changed market pricing
- Slower growth and falling inflation nudge ECB to a cut
- Next cut likely in December
Today the ECB cut rates by 25 basis points. This was not a surprise for markets, as expectations had moved quickly in the past weeks. Only a month ago, the odds of a rate cut at this meeting were seen at 25%. But weak economic data, especially the PMIs published on 23 September which pointed to a stagnating economy, raised the odds of a rate cut today.
Lower than expected inflation data from France and Spain a few days later gave the likeliness of a cut another boost. The view of lower growth and falling inflation was only confirmed by the Economic Sentiment Index and by inflation data from Germany and ultimately the eurozone.
Before today’s meeting markets priced a 25 basis points rate cut at 97%. So, the focus at today’s ECB press conference was at any signals that the ECB sped up the pace of the cuts just at this meeting or whether a rate cut at every meeting is the new norm for now.
The reasons for today’s rate cut were explained in the press statement. The ECB the disinflationary process is well on track, while economic activity has surprised to the downside and financing conditions remain restrictive. The ECB does not pre-commit to any rate path, will stay data-dependent and take a meeting-by -meeting approach to assess further rate cuts. Thus, the press statement gave no clarity about the pace of further easing.
During the press conference ECB-president Lagarde closely stuck to the script of the press statement. Economic activity has disappointed, which will have a downward impact on inflation. Hence the rate cut. The drop in headline inflation to 1.8% and core inflation to 2.7% in September confirmed that the disinflation process is on track.
Even with the knowledge that inflation will most likely rise somewhat in the coming months due to unfavourable base effects (price declines a year ago). Lagarde wasn’t ready to declare victory over inflation yet though. The ECB will keep policy sufficiently restrictive for as long as necessary to get inflation sustainably down to 2%.
With policy still restrictive according to the ECB, a weak economy and slowing inflation, further rate cuts are in store, we think. We agree with market pricing of another 25 basis points rate cut in December.
Market reactions were muted. The German 2-year yield initially fell by 5 basis points, but recovered to a 2 basis points decline. The 10-year yield initially fell slightly, but rose to a modest 2 basis points gain. Equities lost 0.25% and the euro half a cent.