FRANKFURT (MNI) – Growing signs that the Eurozone is entering a
recession will add pressure on the European Central Bank to cut interest
rates as soon as next month.

On Monday, the closely watched Eurozone purchasing manager indices
fell more sharply in October than generally expected and showed overall
activity contracting at the fastest pace in over two years.

The manufacturing PMI dropped to 47.3 from 48.5 last month, marking
the third consecutive month below the 50-mark that divides growth from
contraction. In services, the index showed activity contracting for the
second straight month, falling to 47.2 in October from 48.8 in the
previous month.

A steep decline in new business, dragging down both indices,
suggests further contraction ahead after output has already hit the
lowest level since July 2009. It was not until the third quarter of 2009
that the Eurozone emerged from post-Lehman recession.

Coupled with a significant deceleration in price pressures — also
reflected in the PMI survey — increased risks of a double-dip will put
more pressure on the ECB to reduce interest rates from the current 1.5%.

A number of Council member had already favored a rate cut at the
last monetary policy meeting. The decision at the time to leave rates
unchanged was taken “by consensus” — ECB speak for a lively debate and
sizable minority opposition.

The further darkening of the economic picture may well turn
October’s minority into a majority on the Governing Council as soon as
next month. Even more hawkish Council members, such as Yves Mersch, have
allowed for the possibility that the next move on rates may be downward
should the economy deteriorate further.

At the same time, the chances that the ECB will soon be able to
draw down non-conventional measures appear increasingly slim.

ECB data released Monday showed that the central bank had doubled
its bond buys last week to E4.49 from E2.24 as Italian yields came close
to levels not seen since the ECB started buying Italian debt in August.

The surge in yields was partially driven by ongoing uncertainty
about whether Eurozone leaders will be able to leverage the Eurozone’s
bailout fund, the EFSF, sufficiently to avert further market attacks.
This uncertainty has by no means been removed, despite a weekend of high
level meetings and leaders’ summits in Brussels.

Even if an agreement is found, it could take “some weeks” to
implement any leverage of the fund, a leaked internal EU paper on the
EFSF said. These may end up being painful weeks for the ECB’s balance
sheet.

Political authorities leave no doubt what they expect of their
central bank. The European Commission said Monday that it expects the
central bank to continue to buy bonds. “We expect that the ECB will
continue to play a key role,” a spokesman for the Commission said
Monday.

–Frankfurt newsroom +49 69 72 01 42; e-mail: jtreeck@marketnews.com

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