The European Central Bank (ECB) will cut its deposit rate by 25 basis
points on October 17 and again in December, according to more than 90%
of economists polled by Reuters who now see a quicker decline in euro
zone inflation.
Only 12% of economists polled last month had predicted an October
cut. But most have swiftly changed their view to cuts in both October
and December after September inflation dipped below 2% and some
Governing Council members, including ECB President Christine Lagarde,
hinted a reduction was coming this month.
“The latest developments strengthen our confidence that inflation
will return to target in a timely manner,” Lagarde told a European Union
parliamentary hearing last week. “We will take that into account in our
next monetary policy meeting in October.”
For the last six months, economists predicted a total of three 25
basis point reductions in the deposit rate this year but are now
expecting four.
Over 90% of economists, 70 of 75, said in an October 2-8 Reuters poll
they expected the ECB to cut the deposit rate for a second straight
meeting by 25 basis points next week, taking it to 3.25%. Just five
predicted no change. Last month, only around 12% of economists, or nine
of 77, forecast an October cut.
The central bank will cut again to 3.00% in December, according to 68 of 75 economists, in line with market pricing.
“With fading inflation pressures, both on headline and core, we
believe the ECB is going to be able to get back to somewhere near its
neutral rate more quickly as it manages the accelerating downside risks
to growth,” said James Rossiter, head of global macro strategy at TD
Securities.
“With growth still below trend next year, this is enough for the ECB to cut steadily from October.”
Inflation
The ECB doesn’t have a neutral rate estimate, which neither restrains
or stimulates the economy, but staff published a paper this year
showing a real rate of around zero – or about 2% in nominal terms – when
adjusted for inflation.
An over-55% majority of economists, 41 of 72, predicted the ECB to
cut twice next quarter, to 2.50%. The central bank will lower rates
twice more later next year, the poll showed.
That is a swifter path than was expected last month but in line with current market pricing.
Inflation in the common currency bloc, which declined to 1.8% last
month, will pick up a little and be at the ECB’s 2% target next quarter
and stay around there until at least 2027, the poll found. Economists
last month expected inflation to be 2% later in 2025.
However, core inflation will remain elevated this quarter and average
2.7%, where it was in September, before slowing gradually next year.
“The closer the ECB moves its key interest rates to the neutral
interest rate… the more vigorously the hawks in the ECB Governing
Council are likely to argue against rapid interest rate cuts,” said
Marco Wagner, senior economist at Commerzbank.
“At the beginning of next year, core inflation is still likely to be
around 2.75%, and the continued strong wage increases do not yet suggest
that inflation, particularly in services, will slow noticeably in the
coming months.”
Despite recent PMIs suggesting an economic slowdown the euro zone
economy was expected to grow at a decent pace over the coming year.
The economy will grow 0.2% this quarter, matching Q2’s rate, and
average 0.7% growth this year, the poll showed, before expanding by 1.2%
in 2025 and 1.4% in 2026.
However, growth in Germany, Europe’s largest economy, stagnated last quarter after contracting 0.1% in Q2 and will expand 0.1% this quarter. It would grow 0.8% and 1.3% in 2025 and 2026, respectively.
Article Source: Poll suggests ECB to cut rates by 25bps in Oct and Dec