ECB could cut interest rates next month

Weaker-than-expected manufacturing data in the Eurozone, and Germany in particular, is prompting rumours of a possible interest rates cut. The European Central Bank could be poised to reduce the base rate from 0.75% as soon as next month.

The several leading EU economies have posted worse manufacturing data, indicating that Europe has slipped back into recession despite central bank efforts to boost the economy. 

Manufacturing in Europe’s major growth engine Germany contracted for the first time in five months. The Manufacturing PMI released on Tuesday was lower than expected at 47.9 in April down from 49.0 in March. 

As inflation is falling below the ECB's 2 percent target, the single currency zone’s monetary authority is poised to act sooner. Reuters reports that ECB is expected to cut a quarter-point off the rate at its policy meeting next week.

"The German slowdown, the very low inflation rates we have in Germany, the latest decline in the oil price - all these factors are weighing on inflation and should make even the Bundesbank a little less opposed to a rate cut," Reuters quotes Berenberg Bank economist Christian Schulz.

"Comments from several ECB governing council members about falling inflation and lower future growth prospects in the eurozone suggested the central bank is definitely considering a cut in its main refinance rate, which stands at a record low 0.75%," Justin Doyle of Investec Bank in Dublin told the Irish Independent.

The cut has become even closer after Jens Weidmann, head of Germany's Bundesbank finally admitted that he wouldn’t object to lowering interest rates if the economic data signals a worsening situation in the Eurozone.

Another senior official Executive Board member Benoit Coeure, said on Monday that any further decision on the rates will depend on the data.

"Investors are convinced the ECB will do whatever it takes to prevent a breakup of the monetary union,” Christoph Weil, economist at Commerzbank told the Guardian, adding that the ECB is very likely to reduce rates to 0.5% as well as the Bank of England. 

The ECB President Mario Draghi sounded the possibility of cutting rates during the authority’s last meeting on April 4. 

"For the next meeting in Bratislava, I would look at rates, certainly," one senior ECB official said as quoted by Reuters. 

The European Commission and the ECB still expect recovery in the second half of the year as crisis in debt-driven EU states, such as Greece, Ireland, Portugal and Cyprus seems to be fading after bailout deals were reached. Austerity cuts in the south still put a lot of pressure on key European manufacturers, hitting their exports, the Guardian reports.

Updates from outside Europe also contributed to the sentiment. Weaker manufacturing data came out of China and the indication the pace of expansion in one of the world’s leading economies has slowed down. The US manufacturing sector also slowed. The US demonstrated the slowest pace in six months. In Chinese Manufacturing PMI slipped to just 50.5 points while in the US the indicator fell to 52 from 54.6. In both economies that indicator remained just above the 50 separating expansion from contraction.

The next meeting of the ECB's Governing Council will be held in Bratislava next Thursday.