Most economists see ECB rate cut in September

With inflation well below the central bank’s target, it is expected to cut its deposit rate by 10 basis points to an all-time low of minus 0.5 per cent

Mario Draghi, outgoing president of the European Central Bank. ECB is expected to cut rates to record low. Reuters
Mario Draghi, outgoing president of the European Central Bank. ECB is expected to cut rates to record low. Reuters

The European Central Bank will cut its deposit rate in September after signalling a bias to do so this month, according to economists in a Reuters poll who do not expect a turnaround in the eurozone’s economic fortunes any time soon.

Major central banks on both sides of the Atlantic are under pressure to ease monetary policy to keep inflation expectations from collapsing amid slowing global growth, increased trade protectionism and weak economic data.

When asked what the ECB was likely to do at its July meeting, two-thirds of economists said the central bank would change its forward guidance towards easing.

With inflation well below the central bank’s target and not predicted to pick up soon, the ECB is expected to cut its deposit rate by 10 basis points to an all-time low of minus 0.5 per cent in September.

“We don’t think it will be enough to get inflation back on track towards target. Clearly a 10-basis point move in interest rates doesn’t move the dial really,” said Andrew Kenningham, chief Europe economist at Capital Economics.

“But the governing council will want to signal that they can do more. This ... may have some marginal impact on monetary conditions. But no, I don’t think it will be enough.”

Indeed, the July 4-17 Reuters poll of more than 100 economists showed the outlook for eurozone growth and inflation - and for most major economies in the region - was at best left unchanged or downgraded compared to previous surveys.

At 1.3 per cent, eurozone inflation is lower than where it stood when the central bank stopped its €2.6 trillion (Dh 10.5tn) asset purchase programme in December.

While a majority of economists do not expect the ECB to relaunch asset purchases - known as quantitative easing, or QE - this year, nearly 40 per cent of the respondents expected it to do so, up from about 15 per cent last month.

“A rate cut won’t do. While we do think that the ECB will cut rates, we mostly see this as a policy move that will precede the restart of QE,” said Daniele Antonucci, chief euro-area economist at Morgan Stanley.

The European Commission cut its eurozone growth and inflation outlook last week, citing uncertainty over US trade policy.

Quarterly economic growth is set to have slowed to 0.2 per cent last quarter and the consensus points to only a 0.3 to 0.4 per cent rate of expansion in each quarter through to the end of next year.

Inflation, which the ECB targets at just below 2 per cent, is forecast to average 1.3 per cent this year and is not expected to hit the target at any time in the forecast horizon which runs through to 2021.

That is likely to give the ECB reason to push ahead with stimulus as hinted at in President Mario Draghi’s speeches over the past month.

ECB board member Benoit Coeure said as much on Wednesday.

“Looking ahead, the governing council is determined to act in case of adverse contingencies and also stands ready to adjust all of its instruments, as appropriate, to ensure that inflation continues to move towards the Governing Council’s inflation aim in a sustained manner,” Mr Coeure said.

The backdrop for the ECB, as for many other global central banks easing policy or considering it, is the US-China trade war and the ructions it has caused. The eurozone is particularly exposed as its economy relies heavily on exports.

“I would say the dominant story remains one of trade uncertainty and that will likely dampen the prospects of recovery over the coming six months or so,” said Bert Colijn, a senior economist at ING.

All but four of 63 economists who answered a separate question said International Monetary Fund chief Christine Lagarde, who is due to replace Mr Draghi after he leaves in October, would continue with the current policy stance.

“I think she’s not uncomfortable being in this position ... because she has been a clear supporter of unconventional policy,” said Frederik Ducrozet, strategist at Pictet Wealth Management.

Published: July 18, 2019 09:21 AM


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