ECB Rate Cut Predictions

By Indradip Ghosh
BENGALURU – The European Central Bank is expected to cut its deposit rate by 25 basis points on Sept. 12 and again in December, as reported by a significant majority of economists in a Reuters poll. They predict shallower rate cuts in 2025 than the markets expect.

Inflation dropped to 2.2% in August, the lowest in three years, alongside decreasing wage growth, prompting the ECB to consider another easing. Economists have consistently maintained their outlook of three rate reductions this year since April, while markets are anticipating nearly four cuts.

ECB policymakers remain divided over persistent inflation pressures, targeting 2%, against weak economic growth and potential recession risks. This suggests future policy decisions may be complicated.

In a smaller sample from an Aug. 30 – Sept. 5 poll, the probability of a recession in the next two years was reported at 30%, a slight change since the year began. Nearly 85% of surveyed economists (64 out of 77) forecasted a 25 bps cut next week and again in December, bringing the deposit rate to 3.25%.

While some respondents expect only one more reduction this year, eight predict three. Luca Mezzomo from Intesa Sanpaolo stated that the slowdown in wages and economic activity increases the likelihood of an official rate cut on Sept. 12.

Cautious Approach

With inflation in the euro zone expected to rise slightly by year-end and remain above the ECB’s 2% target until at least the second half of 2025, a cautious approach is deemed necessary by analysts.

The markets predict over 100 bps of rate cuts from the U.S. Federal Reserve this year, driven partly by weaker than expected labor data and indications from Fed Chair Jerome Powell regarding upcoming rate cuts.

Most economists in a separate Reuters survey predict a 25 bps cut in each of the remaining meetings this year. Poll medians suggest the ECB will reduce the deposit rate three times next year, reaching 2.50% by end-2025, which is much more conservative compared to market expectations of around 170 bps.

Reinhard Cluse from UBS pointed out that assumptions hinge on euro zone labor markets remaining tight and wage growth moderating gradually. Although negotiated wage growth slowed last quarter to 3.55% from 4.74% in Q1, it still exceeds levels needed for a 2% inflation target.

UBS’s Cluse expressed skepticism towards the more aggressive rate cuts expected in Q4-24 and Q1-25, arguing that for that to happen, either the global economy must weaken or euro zone inflation and wage dynamics need to be less problematic than current projections.

The euro zone economy, which grew 0.3% last quarter, is expected to average 0.8% growth this year, expanding to 1.3% in 2025 and 1.4% in 2026.