While this is welcome news for Eurozone consumers as it helps their purchasing power, inflation is getting uncomfortably low for the ECB as it is now substantially below its target rate of “close to, but just below 2.0%”.

An inflation rate of 0.7% could easily be seen as warranting an interest rate cut in itself, and the rise in unemployment heaps further pressure on the ECB to act, but we doubt that the bank will do so at its 7 November meeting. There is clearly a strong faction within the ECB’s governing council against taking interest rates below 0.50% while the bank can also point to overall evidence that the Eurozone is continuing to grow modestly after exiting recession in the second quarter.

However, latest developments reinforce our view that the ECB will end up cutting interest rates from 0.50% to 0.25% sooner or later. Indeed, we certainly would not rule out a cut in December, although the ECB may hold off acting until the early months of 2014.