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Bigger Fed Rate Cut May Tempt ECB to Move in October, Praet Says

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The seal of the US Federal Reserve Board of Governors. (Samuel Corum/Bloomberg)

(Bloomberg) -- A larger Federal Reserve interest-rate cut next week raises the chances of the European Central Bank moving in October, according to Peter Praet, a former ECB chief economist.

More aggressive action in the US would reflect a deteriorating economic outlook there, which — together with problems in China — would also affect the euro zone, Praet told Bloomberg TV.

“If the Fed cut by 50 basis points, I think the probability of a cut in October would be higher,” he said Friday. Such a move in the US “would have an impact on markets, of course, and probably also on the currency.” 

The ECB lowered its key rate by a quarter-point on Thursday, as widely expected. Officials kept the door open to a similar step when they meet again in five weeks — even though December is seen as the more likely juncture to cut next.

In the US, recent data have fueled speculation that the Fed may reduce borrowing costs by a half-point to protect the labor market.

Former Federal Reserve Bank of New York President William Dudley sees scope for such a move because dangers to jobs outweigh any lingering inflation challenges.

Praet flagged concerns about Europe’s economy. “Private domestic demand remains extremely weak” and should have brought an admission that risks to growth have increased, he said. Business surveys and energy-price trends will be key inputs before October’s meeting.

“The best scenario for the ECB is December, but December is far away,” Praet said. “Many things can happen.”

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