September’s eurozone flash CPI figures cement the likelihood of the ECB delivering a second straight 25bp cut at the next policy meeting later this month.
Headline CPI rose 1.8% YoY, falling below the ECB’s target for the first time since the middle of 2021, with the print representing the slowest pace of annual inflation since April of the same year.
Core CPI, meanwhile, rose by 2.7% YoY, equalling the slowest rate of the cycle seen back in April. While services inflation remains elevated, at 4.0% YoY, the Governing Council seem unlikely to let this deter them from another cut in a few weeks’ time.
With price pressures cooling more rapidly than expected, and with the recent round of PMI surveys pointing to a sharp loss of economic momentum in September, coupled with lingering downside economic risks, the stars are all aligned for the data-dependent Governing Council to pull the trigger on another rate cut, just five weeks after the previous policy meeting.
While policymakers remain unlikely to pre-commit to a particular policy path, delivering back-to-back cuts, likely followed by a third straight cut in December, heightens the likelihood of the ECB cutting at a regular 25bp cadence from now onwards, until the deposit rate returns to a neutral level – around 2% – early next summer.
Such a dovish path is likely to continue to exert downward pressure on the EUR, most notably in the crosses, with short EUR/GBP, EUR/AUD, and EUR/NOK remaining attractive propositions, given the much slower and more gradual path that those three respective central banks are taking in removing policy restriction.
Against the buck, the EUR may fare somewhat better, given the FOMC’s desire to return to neutral in rapid fashion, including the prospect of larger 50bp moves if the labour market sours. For now, such ‘jumbo’ cuts seem off the table in the eurozone, though a further substantial loss of economic momentum, and sustained undershoot of the inflation target, could well push the ECB into more aggressive action.
