ECB Set to Avoid Consecutive Rate Cuts

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The odds of an October rate cut are slim, according to ECB policymakers. This can provide further interest rate support to the Euro in the coming weeks.

The European Central Bank (ECB) will cut interest rates in September but forgo a consecutive cut in October, according to the analysis of the latest communications from the central bank.

We have heard from a number of ECB Governing Council members in the past two weeks, with all verifying market bets for a September move while cautioning against an October move.

"Recent ECB rhetoric suggests a high bar to a follow-up cut in October after a likely September easing," says a note from currency analysts at HSBC.

This matters for euro exchange rates as consecutive rate cuts are not fully 'priced in', meaning such an outcome would necessitate weakness. But a pause in October would underpin current levels in the single currency, all else equal.

We saw the odds of an October cut rise in the wake of German and Spanish inflation figures, which suggested the ECB must offer a faltering economy more support with the knowledge that inflation was trending lower, but these bets receded after Eurozone inflation revealed an increase in services inflation, which sent a warning that the ECB must proceed with caution.

"The hawks, predictably, point to concerns about still elevated services inflation and wages growth," says HSBC. German Bundesbank President Joachim Nagel is one such hawk, and he said this week that "we shouldn’t prematurely burst into cheers and pat ourselves on the back."

Fellow Governing Council members Cipollone and Stournaras were nevertheless apparently more dovish, saying further rate cuts would still leave policy restrictive.

But HSBC says the views of Gediminas Simkus were the "most enlightening".

Simkus said there are "compelling arguments for an ECB cut in September", citing "structurally sluggish" growth, "clear disinflationary trends" and economic risks which are "tilted downwards".

However, despite this dovish cocktail, he argued that an October rate cut is "quite unlikely" as changes in the upcoming economic projections will likely be unsubstantial.

The market currently views a follow-up October cut as a 1-in-3 likelihood. Should the odds of a cut in October rise in the coming days and weeks, we would anticipate the Euro to weaken.

But given how slim such an outcome is, we think the Euro can remain supported near current levels against the Pound and Euro.