Traders Increase Bets on ECB Interest Rate Cut

Investors are betting that the European Central Bank (ECB) will lower interest rates next month due to sluggish inflation reports from France and Spain.

In France, annual consumer price growth fell to 1.2% in September from 1.8% in August, missing economists’ expectations of 1.6%. Spain saw a similar trend, with inflation cooling to 1.5% from 2.3%, below the forecast of 1.9%.

In Germany, the largest economy in the eurozone, unemployment rose more than expected in September, raising concerns that the country may have entered a recession. Additionally, eurozone sentiment indicators declined further than anticipated, and expectations for pricing lessened.

After these updates, the perceived likelihood of a quarter-point rate cut by the ECB in October surged to approximately 78%, up from about 20% the previous week.

Consequently, German 10-year government bond yields dropped, and the euro weakened against other currencies.

Analysts at ABN Amro noted that the growth outlook for the eurozone is “darkening,” increasing pressure on the ECB to cut rates, despite some recent wage increases. They termed an October rate reduction as their “base case.”

They warned that the eurozone recovery is nearing a stall and, if demand remains weak, businesses might start laying off more employees, heightening recession risks.

Earlier this month, the ECB reduced borrowing costs for the second time in three months. However, ECB President Christine Lagarde stated that the bank is not committed to a specific rate strategy and will adapt its policies based on incoming data.