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.
This article was written by Arno V Venter at www.forexlive.com.
