ECB set to cut rates in September and December – poll

The European Central Bank will cut its deposit rate twice more this year, in September and December, according to a significant majority of economists polled by Reuters who said the risks were skewed towards fewer rate cuts than expected.

That outlook was broadly unchanged from a survey conducted before the ECB delivered its widely telegraphed 25 basis point rate cut on June 6.

Improving business activity, strong wage data and still-sticky price pressures have increased uncertainties around the rationale for more cuts.

In an interview with Reuters yesterday, the ECB’s chief economist Philip Lane said there was no “acute urgency” to lower interest rates if the economy continues to expand.

Still, a strong near-80% majority in the June 12-18 Reuters poll, 64 of 81, expected the ECB to cut twice more this year, in September and December, taking the deposit rate to 3.25%.

That was up from nearly two-thirds in May and just about half in an April survey. While 11 expected just one more reduction this year, six predicted three additional cuts.

ECB President Christine Lagarde repeated at the June press conference that the bank will “continue” to depend on economic data to guide policy decisions, despite the ECB having done everything but formally pre-announce the June cut well in advance.

“Strictly speaking, the ECB’s approach is not data-dependent in the sense that only the incoming data matter. We continue to expect further ECB rate cuts in September and December,” said Greg Fuzesi, euro area economist at JPMorgan.

“Given the pick-up in GDP growth, there was room to wait for more data to clarify key aspects of the forecast. It is unclear if the same argument will be used again to justify another cut in September, ie, that rates would still be restrictive even after a second cut,” he added.

Financial markets, which until recently were priced for one more cut this year, have started pricing in two reductions just in the past few days, in part related to turmoil in French bond markets following President Emmanuel Macron’s decision to call snap parliamentary elections starting later this month.

Inflation, which rose to 2.6% last month from 2.4% in April, will not reach the ECB’s 2% target until the second quarter of 2025, according to poll medians, a bit more optimistic than the latest ECB projections showing inflation above 2% until at least 2026.

Also, fewer rate cuts from the US Federal Reserve, currently expected to deliver at most two or possibly just one reduction this year, could lead the euro, down nearly 3% for the year against the US dollar, to weaken further. That could lead to unwanted imported inflation.

A near-90% majority of economists, 36 of 41, said risks were more skewed towards fewer ECB rate cuts this year than more.

“We have two cuts (this year), but it could turn out to be only one. If there’s a strong reason for the Fed not to cut rates, then maybe that also can have a bearing on the policy space the ECB has,” said Elwin de Groot, head of macro strategy at Rabobank.

Meanwhile, the euro zone economy, which grew 0.3% last quarter, will average 0.7% expansion this year and 1.4% next year, broadly unchanged from the last poll.