The chance of the ECB being forced into decisive action to cut interest rates increased significantly as market expectations for inflation “collapsed” to a new low, a leading economist has said.
Dermot O’Leary, chief economist at Goodbody, said the closely-watched measure, tracking the outlook for eurozone inflation, slumped on Wednesday to below 1.2%, putting it further behind the ECB’s target of 2%.
“The markets do not believe the ECB will meet its inflation target” and it is becoming “increasingly more likely” that the central bank will cut rates, he said.
The timing of any rate cut is still highly uncertain, but any cut would reduce the costs for the many home-loan borrowers who still hold tracker mortgages.
Their already low-cost home loans are linked to the main ECB rate, but variable-rate mortgage-holders would likely miss out again.
After its meeting last week, the ECB said it would consider a range of measures, including reactivating its bond-buying programme and rate cuts, but only should economic conditions warrant it.
Former Central Bank governor Philip Lane, now newly installed as chief economist at the ECB, will play a big role in weighing the economic evidence for the ECB Governing Council to decide on any action in the coming months.
And for the US, S&P Global Ratings said, on Wednesday, that an interest rate cut by the Federal Reserve this year was “likely”, as the central bank there battled the “increasing headwinds for the world’s largest economy” from the fallout of the US-China and US-Mexico trade wars.
“S&P Global Ratings had earlier forecast the Fed to keep benchmark borrowing costs steady through the year,” the ratings firm said.
“But the winds have shifted, with the Trump administration fighting trade battles on more than one front, which we think could disrupt global supply chains and weigh on business and consumer confidence,” it said.
Joshua Mahony, senior market analyst at online broker IG, said that stock markets were hit as hopes for a resolution between the US and Mexico, in its trade spat, waned.
The FTSE-100, in London, and the Euro Stoxx index of 50 large firms both slipped by 0.3%.
Mr O’Leary, at Goodbody, said that markets, which just three months ago put a probability of less than 20% on a US rate cut this year, are now looking at an 80% running certainty for a rate reduction.
Meanwhile, sterling was little changed against the euro, at 88.9 pence, even as Boris Johnson appeared to soften his rhetoric that he would contemplate Britain crashing out of the EU without a deal by the Halloween deadline.
Mr Johnson is the bookies’ favourite to with the Tory contest to become the next British prime minister, later this summer.
“Markets showed some relief at the front-runner’s insistence that a no-deal Brexit is a last resort, yet BoJo’s inability to explain how he will break the Brexit deadlock highlights that he is all style and no substance,” said Mr Mahony at IG.
“The [EU] deal will not change, parliament will not approve the current deal, parliament will reject a no-deal Brexit, and, ultimately, we will see a position where a referendum or general election is the only way forward,” he said.