ECB Expected to Lower Rates Next Week and in December; Smaller Cuts Forecasted for 2025: Reuters Poll

By Indradip Ghosh

BENGALURU – A significant majority of economists in a recent poll expect the European Central Bank (ECB) to lower its deposit rate by 25 basis points on September 12, followed by another reduction in December. These economists anticipate shallower rate cuts in 2025 than what markets are projecting.

Despite inflation dropping to 2.2% in August—its lowest level in three years—and a slowdown in wage growth, which provide the ECB a reason to ease monetary policy next week, economists have consistently predicted a total of three rate cuts this year since April. In contrast, markets are betting on nearly four reductions.

There appears to be a division among ECB policymakers regarding persistent inflation pressures, which the bank aims to keep at 2%, against the backdrop of sluggish economic growth and the risk of a recession. This complexity may influence future policy decisions.

A smaller sample of economists surveyed between August 30 and September 5 indicated only a 30% chance of a recession within the next two years, a figure that has remained stable since the beginning of the year.

Approximately 85% of economists, totaling 64 out of 77 polled, predict the ECB will cut the deposit rate by 25 basis points next week and again in December, bringing the rate down to 3.25%. Meanwhile, four respondents foresee only one more reduction this year, and eight expect three cuts.

“The slowdown in wages and weak economic activity observed recently increases the likelihood of another official rate cut on September 12,” noted Luca Mezzomo, head of macroeconomic analysis at Intesa Sanpaolo.

“The European market has once again been influenced by the U.S. market, starting to anticipate rate cuts at every meeting—this may be excessive for the gradual approach to monetary policy normalization that seems to be the consensus among the Governing Council.”

CAUTIOUS APPROACH

Analysts suggest that, with inflation in the eurozone projected to increase slightly by year-end and expected to remain above the ECB’s 2% target at least until the latter half of 2025, a cautious strategy will likely be necessary.

Currently, markets are forecasting over 100 basis points of rate cuts from the U.S. Federal Reserve this year, commencing this month. This speculation is partly fueled by disappointing labor data from July and comments from Fed Chair Jerome Powell regarding impending rate cuts.

In a different survey, most economists maintained a consistent outlook, predicting a 25 basis point decrease in the three remaining meetings this year.

According to the median forecasts from the poll, the ECB is expected to reduce the deposit rate three times next year, reaching 2.50% by the end of 2025—significantly less than the market’s expectation of approximately 170 basis points in reductions.

“A key assumption is that eurozone labor markets will remain relatively tight and wage growth will moderate gradually,” stated Reinhard Cluse, chief European economist at UBS.

Though negotiated wage growth slowed to 3.55% in the last quarter from 4.74% in the first quarter, it still exceeds levels consistent with a 2% inflation target.

“We are skeptical about the rate cuts expected in late 2024 and early 2025. For such cuts to materialize, we believe the global economy would need to be weaker, and/or eurozone inflation and wage dynamics would have to be more favorable than our current scenario suggests,” Cluse added.

The eurozone economy, which grew by 0.3% last quarter, is predicted to average 0.8% growth this year, followed by expansions of 1.3% in 2025 and 1.4% in 2026.