ECB to Implement Second Rate Cut in September

The European Central Bank (ECB) is scheduled to meet later this month, and Goldman Sachs anticipates further easing of monetary policy. The central bank initiated its rate-cutting cycle in June.

According to analysts at Goldman Sachs, ECB officials have generally indicated that recent data supports the existing economic outlook. They believe that policy rates could be lowered further if the disinflation process continues on its current path. Several ECB members have pointed to the recent slowdown in wage growth as a positive sign, with some suggesting that increasing downside risks to economic growth support a case for less restrictive policies.

Goldman Sachs noted a noticeable shift in the ECB’s signaling, moving from the likelihood of 1-2 additional cuts this year before the summer break to now anticipating two more cuts. However, there appears to be little inclination for a more aggressive pace of rate cuts at this time.

Recent forward-looking indicators and remarks from some ECB officials indicate a slight downgrade in near-term growth forecasts, with projections for growth in 2024 and 2025 being adjusted down by 0.1 percentage points to 0.8% and 1.3%, respectively. Goldman Sachs also expects a modest upward revision of core inflation for 2024 and 2025, reflecting a stronger recent trend, though projections for 2026 remain unchanged. The interplay of falling oil prices and a stronger euro is likely to be countered by lower interest rates and rising gas prices, leaving the headline inflation outlook steady over the next few years.

Given these factors, Goldman Sachs continues to expect the ECB’s Governing Council to implement the widely anticipated second 25 basis point cut on September 12. However, they foresee minimal changes to the ECB’s communication strategy. The Council is expected to uphold a data-dependent and meeting-by-meeting approach without providing explicit guidance on future policy directions. Goldman Sachs maintains its forecast for quarterly cuts leading to a terminal rate of 2.25%, while noting that risks may lean towards a sequential adjustment, particularly in the first half of 2025.