The European Central Bank has carte blanche to accelerate rate cuts. Inflation data published in Germany, Spain, Italy and France This is ammunition for the “doves” (who defend lower rates and a more expansive monetary policy in general). Meanwhile, the “hawks” (who defend a more restrictive monetary policy) are running out of arguments to maintain the cascade of rate cuts that is looming on the horizon. After the preliminary data from this month of September, The October Cup seems closerwhile the December decline is taken for granted.
“Declines in general inflation and services in the main euro zone economies in September“, together with evidence of easing price pressures and a slowdown in activity, have increased the possibility of a further ECB rate cut in October,” Capital Economics said in a note to customers. The latest known data is from Germany, where interest rates are harmonized. Year-on-year inflation moderated to 1.8% in September, according to preliminary data.
The German data was particularly watched as the largest economy in the bloc, capable of determining the final data for the euro zone which will be published this Tuesday and which most analysts were already below 2% before Germany gave the “surprise”. The national data (with a calculation different from that harmonized for Eurostat) was 1.6% over one year for the general CPI, against 1.9% in August and 1.7% expected. German headline inflation is now at its lowest level since January 2021.
Although the German HICP data has not yet been broken down, core inflation, according to the national CPI, fell slightly, from 2.8% to 2.7%, as did inflation , according to the services CPI, from 3.9% to 3.8%. Carsten Brzeski, chief strategist at ING, is clear. “The just-released preliminary estimate of German inflation in September has everything the ECB needs to continue cutting rates at the September meeting”he wrote in a brief note entitled “The ECB’s doves, reinforced by German disinflation”.
Even if this seemed predictable, few had anticipated such a drastic moderation of the CPI in the major powers of the euro zone. The fall in oil prices (20% in two months) generated a cooling of prices which led to inflation even lower than the ECB’s objective. Even if this slowdown is not synonymous with victory (it should accelerate somewhat at the end of the year), the truth is that it gives the ECB room to lower rates at its discretion and try to revive an economy that is showing signs of success. clear signs of stagnation.
Precisely, this morning, José Luis Escriva, governor of the Bank of Spain, gave a speech in which he highlighted the worrying slowdown in the euro zone economy, a sort of appeal to the ECB to lower rates, encourage investment and revive the European economy with these measures.
The CPI of Spain, France and Italy
The set of preliminary September inflation figures for eurozone countries that began last Friday added even more pressure on the ECB to accelerate rate cuts after a giant 50 basis point cut by the US Federal Reserve which in itself has already complicated the intention of those responsible. in Frankfurt to take a break in September and decide on a possible further reduction in December.
On Friday, French data gave the starting signal. The CPI was reduced in September to 1.2% year-on-year, according to advanced data published by the National Institute of Statistics (Insee). This figure is six tenths lower than that of August and is well below the 1.6% expected by analysts. This is in fact the lowest level of inflation in France since July 2021. Even if the main catalyst for this drop was the drop in energy prices (3.3% drop over one year in prices energy, compared to an increase of 0.4% in August, the main reason being petroleum products), the main message for the ECB comes from the inflation of services in France. The increase in services slowed to 2.5% in September, five tenths less than in August.
In Spain, the annual rate of the CPI maintained the trend and moderated to 1.5% in September, eight tenths lower than that recorded in August and its lowest level since March 2021, three and a half years . According to data published Friday by the National Statistics Institute (INE), this development reflects the drop in fuel prices, and also, although to a lesser extent, the drop in food and electricity compared to on the rise from September 2023. and culture also influences, whose prices fall more intensely than the same month of the previous year, adds the INE.
This Monday, before German data clarified coordinatesthe Italian CPI cemented the narrative. According to ISTAT, general inflation fell to 0.7% year-on-year (compared to 1.1% in August), mainly due to changes in energy prices. In September, energy prices, both regulated (+10% compared to +14.3% in August) and unregulated (-11% compared to -8.6%), contributed to this disinflationary trend. Furthermore, the prices of recreational and cultural services (2.5% compared to 2.9%) and transport services (2.5% compared to 2.9%) also experienced declines, which offset the inflationary pressure. of the increase in food prices (1.3% against 0.8%). .
“With inflation falling faster than expected and significant cuts in the US, we believe the ECB Council can find a small majority to agree to a rate cut in October. However, we recognize the risks involved in this decision, because “we believe that services inflation will stagnate in September due to unfavorable base effects,” said Alexander Valentin, senior economist at Oxford Economics. “This is clear from the latest communications outside of. meeting is that the hawks and doves factions are at an all-time high within the ECB. Ultimately, this inflation data should be decisive for a reduction in October,” said Francesco Pesole, strategist at ING.
The ECB has no other way
“The ECB is a central bank with a unique mandate, focused entirely on inflation. Although it is more likely to pay more attention to the latest inflation data than economic updates at its meeting next month, services inflation remains too high in the euro zone to allow a reduction in October. In addition, the central bank’s forecasts already expect a further rise in inflation at the end of the year. , which suggests that it could minimize any short-term easing of price pressure,” contrasts BCA Research. analysts. “Ultimately, the eurozone’s poor economic outlook justifies a reduction in October and greater relaxation. “Our strategists believe that the ECB would be making a political error by placing too much emphasis today on inflation to the detriment of growth,” they say.
“The ECB will welcome the fall in core inflation, but it is not a big surprise, and services inflation remains uncomfortably high. However, at their meeting in mid-October, the authorities will have to also given growing evidence that underlying price pressures and inflation expectations have eased and this activity is slowing or, in the case of Germany, contracting. Tomorrow we will confirm our forecasts for the ECB, but the risks clearly point to rate cuts sooner than expected,” they say at Capital Economics.
