By Balazs Koranyi

FRANKFURT (Reuters) – Inflation has eased more than expected in two of the euro zone’s biggest economies, and the German jobs market has continued to cool this month, adding to an already substantial case for the European Central Bank (ECB) to cut borrowing costs further next month.

The euro zone economy has been skirting recession for most of the year, and price pressures have eased, fuelling arguments that the ECB has fallen behind the curve in supporting an ailing economy.

The ECB has pushed back on calls for faster policy easing on the premise that wage growth and services inflation remain uncomfortably high. However, lower-than-predicted inflation readings from France and Spain on Friday challenged this narrative.

French inflation slowed to 1.5% in September from 2.2%, below expectations of 2.0%, while Spanish inflation eased to 1.7% from 2.4%, undershooting expectations for 1.9%, as services price growth eased and energy prices fell.

Separate data on price expectations also challenged the ECB’s hesitancy, showing consumers cutting their price growth expectations for the next 12 months to their lowest level since September 2021.

Adding to recent data that paint a gloomy picture on growth, a key euro zone sentiment indicator dropped more than expected on Friday while also showing cooling price expectations.

These figures suggest euro zone inflation could drop well below the ECB’s 2% target this month, fuelling bets that the ECB will accelerate policy easing.

Indeed, investors raised their bets on Friday regarding another rate cut on October 17, now pricing in about a 75% chance of a move compared to only about a 25% chance seen last week.

The ECB cut rates in June and September, and policymakers had deemed an October 17 rate cut unlikely until a recent string of disappointing data, as ECB projections show inflation returning to the 2% target on a durable basis only late next year.

DOVES TO SEEK RATE CUT

However, sources close to the discussion indicated that a cut must be on the table now, and policy doves will be pushing for one out of fear of a rapidly cooling economy and persistent undershooting of inflation targets.

More conservative policymakers, or hawks in central bank jargon, say quarterly cuts are more appropriate because hard data on wages, employment, and growth are only available every three months, alongside the ECB’s new projections.

Another issue is that inflation is likely to tick up towards the end of the year, and making quick cuts while inflation is rising would send a negative signal.

“When leading indicators like this week’s PMIs and Ifo index, as well as lagging indicators like today’s German labour market data and actual inflation data out of France and Spain, all point to weak growth and faster disinflation, ECB doves will clearly be flying high,” said ING economist Carsten Brzeski.

Economists have also applied pressure on the ECB. BNP Paribas and HSBC changed their calls to predict an October move, while Deutsche Bank and Societe Generale stated that the ECB needs to accelerate easing.

Adding to the case for a rate cut, data out of Germany, the bloc’s biggest economy, showed an unexpected rise in unemployment for September, fueling fears that Germany may already be in recession.

Germany’s economy has shrunk in two of the last three quarters, with the Bundesbank, its central bank, already stating that another negative reading was possible due to a deep industrial recession.