ECB to cut rates next week and December; shallower reductions in 2025: Reuters poll

The European Central Bank will cut its deposit rate by 25 basis points on Sept. 12 and again in December, according to a significant majority of economists in a Reuters poll who predict shallower rate cuts in 2025 than markets are expecting.

Although inflation falling to 2.2% in August, its lowest in three years, and slowing wage growth have given the ECB a green light to ease again next week, economists have held since April their view of a total of three reductions this year. Markets are pricing nearly four cuts.

ECB policymakers are divided over lingering pressures on inflation, which it targets at 2%, versus weak economic growth and a potential recession, sources close to the discussion told Reuters. That suggests policy decisions going forward could be complicated.

A median forecast from a smaller sample of economists in an Aug. 30 - Sept. 5 Reuters poll showed the probability of a recession in the next two years at just 30%, little changed since the start of this year.

Nearly 85% of economists, 64 of 77, predicted the ECB would reduce the deposit rate by 25 bps next week and again in December, taking the deposit rate to 3.25%. 

Four respondents expected just one more reduction this year while eight predicted three.

"The slowdown in wages and weak economic activity seen in recent weeks increase the likelihood... for another official rate cut on Sept. 12," said Luca Mezzomo, head of macroeconomic analysis at Intesa Sanpaolo (OTC:ISNPY). 

"The European market has once again been dragged down by the U.S. market, beginning to discount rate cuts at every meeting - too much for the gradual approach to the withdrawal of monetary tightening that seems to be the convergence point for the Governing Council."

CAUTIOUS APPROACH

With inflation in the common currency bloc expected to pick up slightly by year-end and remain above the ECB's 2% target at least until the second half of 2025, a cautious approach is likely warranted, analysts say.

Markets are currently pricing in more than 100 bps worth of rate cuts from the U.S. Federal Reserve this year, starting this month, partly driven by weaker-than-expected July labour data and hints from Fed chair Jerome Powell at Jackson Hole that rate cuts were coming.

Most economists in a separate Reuters survey, who also have remained consistent in their outlook, predicted a 25 bps rate cut in each of the three remaining meetings this year.

The ECB will reduce the deposit rate three times next year, according to poll medians, reaching 2.50% by end-2025, much shallower than market pricing of around 170 bps of reductions.

"A key assumption is euro zone labour markets will remain relatively tight and wage growth will moderate only at a gradual pace," said Reinhard Cluse, chief European economist at UBS.

Although negotiated wage growth slowed last quarter to 3.55% from 4.74% in Q1, it remained above levels consistent with a 2% inflation target.

"We are sceptical about the more front-loaded rate cuts priced for Q4-24 and Q1-25. For the latter to be realised, we think the global economy would have to be weaker and/or euro zone inflation and wage dynamics more benign than our current base case scenario implies," UBS' Cluse added.

The euro zone economy, which grew 0.3% last quarter, will average 0.8% growth this year, the poll showed, before expanding 1.3% in 2025 and 1.4% in 2026.

Source : Economy News by Reuters - Sep 5, 2024