ECB to Reduce Rates by 25bps in October and December as Euro Zone Economy Weakens: Reuters Poll

By Indradip Ghosh

BENGALURU – The European Central Bank (ECB) is expected to reduce its deposit rate by 25 basis points on October 17 and again in December, according to a recent poll where over 90% of economists expressed their anticipation of a faster decline in inflation within the euro zone.

Just 12% of economists surveyed the previous month predicted a rate cut in October. However, following a drop in inflation below 2% in September and signals from some Governing Council members, including ECB President Christine Lagarde, the consensus shifted towards expecting cuts in both October and December.

Lagarde noted, "The latest developments strengthen our confidence that inflation will return to target in a timely manner," during a hearing with the European Union parliament last week. "We will take that into account in our next monetary policy meeting in October."

Previously, economists had anticipated three 25 basis point reductions in the deposit rate this year, but forecasts now indicate four cuts.

In a recent poll conducted from October 2-8, 70 out of 75 economists indicated they expect the ECB to lower the deposit rate by 25 basis points at next week’s meeting, reducing it to 3.25%. Only five economists predicted no changes. Last month, around 12% of economists had forecast an October cut.

According to 68 out of 75 economists, the ECB is also likely to cut the rate to 3.00% in December, aligning with market expectations.

James Rossiter, head of global macro strategy at TD Securities, stated, "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." He added, "With growth still below trend next year, this is enough for the ECB to cut steadily from October."

The ECB has not officially defined its neutral rate, which does not restrain or stimulate the economy. However, a staff report published this year suggested a real rate around zero—approximately 2% in nominal terms after adjusting for inflation.

A significant majority of economists, over 55%, predicted that the ECB would implement two cuts next quarter, bringing the rate down to 2.50%. The poll also indicated further reductions later next year.

This trajectory reflects a more rapid adjustment than previously anticipated and aligns with the current market outlook.

Inflation in the euro area fell to 1.8% last month but is expected to rise slightly, reaching the ECB’s 2% target in the upcoming quarter and averaging around that rate until at least 2027. Economists had previously forecast inflation to hit 2% as late as 2025.

However, core inflation is projected to remain high, averaging 2.7% this quarter, the same level observed in September, with a gradual slowdown expected next year.

Marco Wagner, a senior economist, noted, "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." He cautioned that core inflation is anticipated to remain around 2.75% at the beginning of next year, and robust wage increases do not indicate a noticeable slowdown in inflation, especially within the services sector.

Despite recent indicators suggesting an economic slowdown, the eurozone economy is expected to grow at a reasonable pace in the coming year.

The economy is projected to grow by 0.2% this quarter, matching the growth rate from Q2, and averaging 0.7% growth for the year. Further growth is expected with projections of 1.2% in 2025 and 1.4% in 2026.

However, Germany, Europe’s largest economy, displayed stagnation last quarter following a contraction of 0.1% in Q2, with a forecast of 0.1% growth this quarter. Predictions for growth in Germany stand at 0.8% in 2025 and 1.3% in 2026.