Falling inflation prompts bets ECB will ease again soon

Monday 04 November 2013 07.42
Analysts believe ECB will cut rates in the coming months
Analysts believe ECB will cut rates in the coming months

Tumbling euro zone inflation has firmed up market expectations that the European Central Bank will be forced to ease monetary policy in the coming months, taking the shine off a resurgent euro.
October's fall in the annual rate of price increases to 0.7% took it way under the ECB's target of at or just below 2%.

It raised the spectre of deflation in some areas and of a risk to the euro zone's nascent economic recovery.
Money markets, which were already pricing in the possibility of looser ECB policy in the coming year, now reflect an outside chance of a move in the next few months.

Indeed some big banks, including UBS, RBS and Bank of America/Merrill Lynch have said they now expect a cut next week when the ECB meets to discuss policy. A Reuters poll taken before the inflation data showed no expectation of a rate cut.
From the market's point of view, it really comes down to when rather than whether.

Some analysts believe that the ECB will wait to make a final decision until December, when its new staff economic forecasts come out, including inflation.
A rate cut would be the first since May, when the ECB lowered the refinancing rate to a record low of 0.5%.
It would hurt the euro's rate advantage over other currencies and make it less alluring for investors. It fell to a two-week low below $1.35 on Friday and has shed 2.5% since it hit a two-year high of $1.3833 on October 25.
The ECB tried to talk down the euro in February, when subdued inflation along with the euro at $1.37 prompted bank President Mario Draghi to flag risks to growth.
Any hint from Draghi the euro was hurting growth would prompt another sell-off in the single currency, traders said.
The ECB could also give banks another dose of cheap long-term loans, an option that could weigh on the single currency