The European Central Bank will cut its deposit rate twice more this year, in September and December, according to an over-80% majority of economists polled by Reuters, fewer reductions than markets currently expect.
Since April, economists in Reuters surveys have remained consistent in predicting a total of three cuts this year including the one already delivered in June. By contrast, interest rate futures are pricing a total of four cuts by end-year.
An unexpected rise in euro zone inflation in July, near record-low unemployment and still-steady economic activity in the common currency bloc give ECB policymakers cause to be cautious.
Over 80% of economists, 66 of 81, in a Aug. 8-13 Reuters poll predicted the ECB's Governing Council will deliver two more 25 basis point rate cuts this year, in September and December, taking the deposit rate to 3.25%. That majority view was broadly in line with the last two Reuters surveys.
Five respondents expected just one more reduction this year while eight predicted three.
"The latest developments, particularly on the inflation front, are relatively hawkish," said Fabio Balboni, senior European economist at HSBC. "We don't think the ECB will necessarily feel the urgency to rush towards cutting faster."
The majority of forecasters looking for two more ECB rate cuts this year has held steady despite financial market volatility earlier this month.
Following a weaker-than-expected July U.S. jobs report and inflation trending towards the Federal Reserve's 2% target, U.S. rate futures markets priced in as much as 120 basis points of Fed rate reductions in 2024 last week compared with 50 beforehand. It is roughly 100 now.
Although many banks, including some primary dealers to the Fed, have changed their Fed outlook, most of those same banks haven't changed their ECB rate view. The Fed is widely expected to start cutting rates at its September meeting, just days after the ECB next meets.
Euro zone inflation, which unexpectedly rose to 2.6% last month from 2.5% in June, will average 2.4% this year, the poll showed, and not reach the ECB's 2% target until the second half of 2025.
That outlook was slightly more optimistic than projections the ECB made in June, but some are bracing for the central bank's staff projections to worsen in September.
"I expect the ECB to slightly revise upward its inflation projections and it's strange then to continue cutting rates," said Carsten Brzeski, chief euro zone economist at ING.
"Without the market turmoil it would not have been clear the ECB is really going to cut in September."
The central bank is expected to reduce the deposit rate four times next year, according to poll medians, reaching 2.25% by end-2025.
The euro zone economy, which was expected to have grown 0.3% last quarter, will average 0.7% growth this year, the poll showed, before expanding by 1.3% in 2025 and 1.4% in 2026.
(Other stories from the Reuters global economic poll)
