ECB to cut rates in September and December as inflation refuses to budge: Reuters poll by Reuters

By Indradip Ghosh

BENGALURU (Reuters) – The European Central Bank will cut its deposit rate twice this year, in September and December, according to a more than 80 percent majority of economists polled by Reuters, fewer cuts than markets currently expect.

Since April, economists polled by Reuters have remained consistent in predicting a total of three cuts this year, including the one already made in June. In contrast, interest rate futures price a total of four cuts by the end of the year.

An unexpected rise in eurozone inflation in July, near-record unemployment and still-steady economic activity in the common currency bloc are giving ECB policymakers reason to be cautious.

More than 80% of economists, 66 of 81, in an Aug. 8-13 Reuters poll predicted the ECB’s governing council would make two more 25-basis-point interest rate cuts this year, in September and December, lifting the deposit rate at 3.25%. This majority opinion was broadly in line with the last two Reuters polls.

Five respondents expected one more cut this year, while eight predicted three.

“The latest developments, especially in terms of inflation, are relatively unpleasant,” said Fabio Balboni, senior European economist at HSBC. “We don’t think the ECB will necessarily feel the urgency to rush to cut faster.”

Most forecasters looking for two more ECB rate cuts this year have held steady despite financial market volatility earlier this month.

Following a weaker-than-expected US jobs report in July and inflation pointing towards the Federal Reserve’s 2% target, US interest rate futures markets priced in as much as 120 basis points of cuts of the Fed’s interest rate to 2024 last week, compared to 50 previously. Now there are about 100.

Although many banks, including some primary Fed dealers, have changed their Fed outlook, most of those same banks have not changed their view of the ECB rate. The Fed is expected to start cutting rates at its September meeting, just days after the ECB’s next meeting.

Eurozone inflation, which unexpectedly rose to 2.6% last month from 2.5% in June, will average 2.4% this year, the survey showed, falling short of the target of 2 % of the ECB until the second half of 2025.

That outlook was slightly more upbeat than the ECB’s forecast in June, but some are bracing for the central bank’s staff forecast to worsen in September.

“I expect the ECB to revise its inflation forecasts slightly upwards, and it is strange then to keep cutting rates,” said Carsten Brzeski, chief eurozone economist at ING.

“Without the market turmoil it would not have been clear that the ECB would actually taper in September.”

The central bank is expected to cut the deposit rate four times next year, according to survey medians, to 2.25% by the end of 2025.

The eurozone economy, which was expected to have grown by 0.3% last quarter, will grow by an average of 0.7% this year, the survey showed, before expanding by 1.3% in 2025 and 1 .4% in 2026.

(Other stories from the Reuters Global Economic Survey)