The general consensus in the market is that the ECB will lower its key interest rate in the week after next, and this is also the view of our ECB analysts. The issue with the ECB is that the reason for the October rate cut makes a fundamental revision of the ECB interest rate path necessary, Commerzbank’s Head of FX and Commodity Research Ulrich Leuchtmann notes.
ECB has good reasons for a loose monetary policy
“Now, this reason obviously consists of the collapse of euro zone inflation expectations. From a market perspective, the ECB therefore has good reasons for a loose monetary policy. Low inflation is good for the euro (because its domestic purchasing power is eroding more slowly), low interest rates are bad.”
“The combination is therefore negative for the euro overall because the downward revision of inflation expectations makes it more likely that we will see a relapse into ‘lowflation’ in Europe, with the ECB having to set its interest rate as low as technically possible without inflation picking up.”
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