Big banks predict Eurozone rate cut as Draghi runs out of options

A rate cut is now a very real possibility for the Eurozone.

The drop in the consumer price index to 0.7 per cent in October means inflation in the euro area is rising at the slowest pace in four years, well below the European Central Bank's (ECB) target of just under two per cent and signalling the ninth month in a row that the rate has been less than the ECB's ceiling.

Available options for president Mario Draghi to tackle inflation may be diminishing, and an interest rate cut from 0.50 per cent to 0.25 per cent is now expected to be on the cards at the bank's 7 November policy meeting.

UBS, Bank of America Merrill Lynch and RBS are all predicting rate cuts next week, with Societe Generale, BNP Paribas and JPMorgan seeing cuts in December.

Howard Archer of IHS Global Insight comments that, whilst the ECB may prefer to hold fire on interest rates until December, IHS believe there is a compelling case to cut next week, as current CPI and GDP growth forecasts for 2014 "make it very hard for the ECB not to cut interest rates, given its mandate and the still very limited growth outlook."

This morning, with the liquidity squeeze continuing, the ECB said that euro area banks will repay €10.7bn next week - up from €1.8bn this week - as part of the ECB's long term refinancing operation (LTRO).

With no credit growth, a strong currency (the euro hit a 23-month high against the dollar earlier this month) and falling wages across much of Europe - along with a quarter of under-25s out of work and area unemployment rising by 60,000 in September, to reach a record high of 19.4m - Societe Generale's Kit Juckes says the real surprise is that so many people are surprised by low inflation.

If the European Central Bank wants to avoid further Japanification of the Eurozone, they need to do all they can to ease monetary policy, says Juckes. The euro's lack of growth, low bond yields and escalation of public debt mean the the Eurozone is seen by many as edging ever closer to a Japanese-style stagnation of growth.