ECB View: Hurdle for more cuts lower than for QE expansion – The ECB published the Account of the September Governing Council meeting today. The report starts by observing that the economic and inflation outlook had clearly deteriorated, mentioning ‘overall, the Governing Council was confronted with a protracted slowdown in the euro area economy, persistent downside risks and an inflation outlook that continued to fall short of its medium-term inflation aim’. Subsequently, it refers to the fact that the ECB had to lower its own forecasts for inflation in the medium-term successively and significantly since December 2018, bringing the 2021 forecast down from 1.8% initially, to 1.5% now. It continues by stating ‘The further downgrade of the inflation outlook – despite the fact that the financial conditions embedded in the forecast already reflected substantial expectations for additional policy easing – meant that inflation was moving further away from levels considered to be consistent with the ECB’s policy aim’, implying that ‘a comprehensive policy response was warranted’.
When discussing the monetary policy stance and policy considerations the Account reveals that all members of the Governing Council agreed that a further easing of the monetary policy stance was warranted, but that the views on the various elements of the policy package differed. In fact, ‘a number of reservations were expressed about the individual elements of the proposed policy package’. Most importantly, a ‘clear majority’ of members agreed with the restarting of net asset purchases, but ‘a number’ of members assessed the case for renewed purchases as not sufficiently strong and considered a package not including net purchases to be adequate. What is more, ‘a very large majority’ of members agreed to cut the deposit rate by 10bp to -0.5%, while a ‘few members’ were considering a 20bp rate cut, ‘in particular as part of a package that would exclude net asset purchases’. Looking forward, we think the ECB will need to ease policy further given that we are more pessimistic than the central bank on the outlook for GDP growth and inflation. Indeed, incoming data since the September Governing Council meeting have signalled that the slowdown in the global economy will be more protracted, which will also weigh on the eurozone economy (see here). We expect an additional 10bp reduction of the deposit rate in December, while the pace of net asset purchases could well be stepped up. Having said that, the Account suggests that the hurdle for additional rate cuts is lower than that for raising the monthly amount of asset purchases. (Nick Kounis & Aline Schuiling)
US Macro: Inflation still going nowhere – September Core CPI inflation came in below expectations at 0.1% mom (ABN/consensus: 0.2%), while the annual measure was in line at 2.4% yoy (the difference due to rounding). The downside surprise was driven by bigger payback in core goods inflation than we had factored into our forecast, with used cars and apparel registering declines on the month. More importantly for the outlook, core services inflation (excluding shelter, transportation and medical) has continued to soften, with annual inflation falling to 1.6% yoy – the weakest since March 2018. Services is where you would expect to see the effects of a tight labour market and higher wage growth, but there is still little sign that businesses are passing on higher unit labour cost growth. With the labour market now weakening (albeit modestly), and wage growth looking to have peaked for the time being, the prospects for a meaningful pickup in inflation continue to dim. While not the driver of rate cuts for most on the FOMC, muted inflation is certainly an enabler of easier policy. As such, the continued softness supports our expectation of further Fed rate cuts in October and December. (Bill Diviney)