In a recent poll conducted by Reuters, a significant majority of economists predicted that the European Central Bank (ECB) will cut its deposit rate twice more this year. The expected months for these rate cuts are September and December. The outlook for these rate cuts remained unchanged from a previous survey, despite the ECB already delivering a 25 basis point rate cut in June.
The risks associated with fewer rate cuts than expected are skewed according to the economists interviewed. Factors such as improving business activity, strong wage data, and persistent price pressures have led to uncertainties around the need for additional cuts. However, there is no “acute urgency” to lower interest rates, as mentioned by ECB Chief Economist Philip Lane in an interview with Reuters.
Despite the uncertainties, a strong majority of economists, around 80%, anticipate that the ECB will cut rates twice more this year. The expected rate after these cuts would be 3.25%. Some economists believe that only one more reduction will occur, while others predict up to three additional cuts.
Financial markets were initially priced for one more rate cut this year, but recent developments have led to expectations for two reductions. Factors influencing this change include turmoil in French bond markets and the latest inflation rate of 2.6%. Economists predict that inflation will not reach the ECB’s 2% target until Q2 2025, which is more optimistic than the ECB’s projections.
The actions of the US Federal Reserve also play a role in the ECB’s decision-making process. With fewer rate cuts expected from the Federal Reserve, the euro may weaken against the US dollar, leading to imported inflation. This could impact the ECB’s rate cut decisions and create additional uncertainties for the Eurozone economy.
Despite the majority expectation for rate cuts, some economists believe that risks are more skewed towards fewer cuts this year. The performance of the US Federal Reserve and external economic factors could influence the ECB’s decision-making process, leading to potential changes in the planned rate cuts. The Eurozone economy is forecasted to experience 0.7% expansion this year and 1.4% growth next year, based on the latest poll results.
While the majority of economists expect the ECB to cut its deposit rate twice more by the end of the year, there are significant uncertainties and risks associated with these decisions. Factors such as inflation rates, market responses, and external influences all play a role in shaping the ECB’s monetary policy. It will be crucial to monitor economic developments closely to understand the rationale behind any future rate cuts and their potential impact on the Eurozone economy.