The ECB's rate cut forecast revised to October by BNP Paribas, following HSBC's shift, amid increased market speculation for a cut next month.

Recent economic data from France and Spain, showing a decline in inflation rates, has fueled the argument for a rate cut. Barclays and Deutsche Bank have also joined the chorus, with Barclays predicting a series of 25 basis point cuts until the main refinancing rate reaches 2% from its current level of 3.75%. The market is now pricing in a 94% chance of a rate cut at the ECB’s next meeting, reflecting a significant shift in sentiment over the past few weeks. Analysts, including former ECB deputy Vitor Constancio, support the notion that a cut is necessary given the weak economic indicators, particularly the disappointing PMI figures for the Eurozone.

Market Sentiment and Predictions

• Current Predictions: The market is increasingly confident, with the implied probability of a quarter-point reduction in October now around 78%, up from just 20% a week prior.
• Economic Indicators: The recent drops in inflation in key Eurozone countries suggest that the ECB may need to act to stimulate growth and support economic recovery.

Implications of Rate Cuts

• Interest Rate Trajectory: If the ECB proceeds with the anticipated cuts, it could lead to a gradual reduction in the main refinancing rate, potentially impacting borrowing costs and economic activity across the Eurozone.
• Investor Reactions: The adjustment in forecasts has led to increased market activity and speculation, with investors positioning themselves ahead of the ECB’s decisions.

The evolving situation underscores the ECB’s challenge in navigating economic pressures while maintaining stability in the Eurozone.