Big Fed Cut puts an ECB move next month on traders' radar

• A big interest rate cut from the U.S. Federal Reserve on Wednesday raised bets on further policy easing at the European Central Bank in October, but this is still not the most likely outcome given different economic realities.
• The ECB has already cut interest rates in June and earlier this month, and many at the bank have hinted at steady, quarterly rate cuts ahead to make sure inflation is defeated on a durable basis.
• While the Fed's apparent rush lends some support to arguments that the ECB is falling behind the curve, given rising recession risks, the fundamental economics have not changed overnight, so policy hawks on the Governing Council can argue for waiting until December.
• This is also reflected in the market pricing a 35% chance of a 25 basis point (bps) deposit rate cut in October, up from 30% a day ago. The 5% increase is small but still, a notable shift that leaves December as the most likely date for an ECB move.
• The ECB is likely to take it slower because it has a lot less to do. It has five, maybe six 25bps cuts until it reaches a "neutral" interest rate level at around 2.0% or 2.25%, according to ECB's and other estimates. The Fed meanwhile has probably eight such reductions until then, so the world's top two central banks might still reach their end point of policy easing at the same time.
• While Eurozone rate cuts are on the radar, inflation, now at 2.2%, could tick up towards 2.5% by the end of the year. Thereafter, inflation will likely slow to 2% by the end of 2025 as Entrenched wage pressures keep service costs elevated. This is why conservative policymakers, or hawks in market jargon, have cautioned against moving too fast.

(Source: Reuters)