ECB Interest Rates Forecast

According to new estimates from analysts at Bank of America, the European Central Bank (ECB) is expected to significantly reduce interest rates at its upcoming October meeting.

In a note to clients, the analysts referenced comments made by ECB President Christine Lagarde on Monday, who stated that recent economic data had “strengthened” policymakers’ confidence in the prospect of returning inflation to their 2% target in a timely manner.

Lagarde mentioned, “We will take that into account in our next monetary policy meeting in October.”

The Bank of America analysts noted that her language was reminiscent of the justification used for a quarter-point rate cut in September, indicating a strong likelihood of a cut in October, unless there are surprising data changes before then.

Previously, mixed inflation and economic activity figures from the eurozone had led the analysts to expect the ECB would opt out of an October rate reduction.

After the anticipated cut this month, the analysts predict “back-to-back cuts of 25 basis points each,” lowering the ECB’s crucial deposit facility rate to 2% by June 2025, a quarter earlier than initially forecasted. The ECB manages monetary policy through its deposit rate.

Two additional cuts in September and December 2025 are also projected, aiming to reduce the terminal rate to 1.50%, which is six months earlier than previous estimates.

The analysts noted a divergence from the consensus that projected the rate to be 2.25% for the end of 2025 and 2.20% for 2026, as well as from market pricing.

In their last meeting in September, the ECB cut rates for the second time in three months, owing to a sluggish eurozone economy and decreasing inflation pressures. The deposit rate was decreased by 25 basis points to 3.5%. Previously, in July, the ECB maintained the benchmark rate at 3.75% before cutting it from an all-time high of 4% in the month prior.

During a press conference, Lagarde emphasized the central bank’s lack of commitment to a specific rate path and reiterated that future policy decisions would remain data-dependent.