A big interest rate cut by the US Federal Reserve on Wednesday has raised expectations of further policy easing by the European Central Bank (ECB) in October, but this is still not the most likely outcome given the different economic realities.
The ECB cut interest rates in June and earlier this month, and many at the bank have hinted at regular rate cuts in the future to keep inflation under control effectively.
While the Fed's hasty move lends some support to the argument that the ECB is lagging behind in the face of rising recession risks, economic fundamentals have not changed dramatically, so conservative policymakers on the ECB's Governing Council could make a case for waiting until December.
This is also reflected in market prices, which now see a 35% chance of a deposit rate cut of 25 basis points in October, up from 30% the day before, a small but still significant change that leaves December as the most likely date for ECB action.
The ECB is expected to move more slowly because it has less to do.
It may have five or six reductions of 25 basis points until it reaches a "neutral" interest rate level of around 2.0% or 2.25%, based on various estimates including the ECB's own.
Meanwhile, the Fed may have eight such reductions so that both of the world's leading central banks may reach the endpoint of policy easing at the same time.
European zone inflation, currently at 2.2%, may rise to around 2.5% by the end of the year and is expected to decline only slowly to 2% by the final weeks of 2025, as continued wage pressures increase the cost of services.
This is why conservative policymakers, known as hawks in market terms, have warned against moving too quickly.
Slovakia's Peter Kazimir has ruled out a rate cut in October, while influential policymakers such as Isabel Schnabel and Klaas Knot have previously argued that periodic rate cuts that coincide with new projections make sense.
"Inflation is currently not at the desired level," said the head of the Bundesbank, Joachim Nagel, on Wednesday.
Labor costs rose by 4.7% in the second quarter, well above the 3% considered consistent with the ECB's inflation target, and unions continue to demand substantial wage increases to compensate for real income losses.
The ECB will also receive little truly relevant data in the four weeks leading up to its meeting on October 17.
Wage and growth figures will only be available by December, when new projections will also be published. This leaves the ECB with second-tier figures, such as survey data on lending and corporate intentions, to consider.
These softer indicators would need to show a significant slowdown for policymakers to act ahead of their own projections with rate cuts.
