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European Central Bank: Interest Rate Cut in September according to economists

25 Jul 2019

The European Central Bank, in September, will proceed to an interest rate cut according to economists’ predictions. The ECB is facing a political uncertainty and at the same time, an economy external weakness, which lead to a dovish tone of late from its President Mario Draghi.

ECB’s Governing Council will have a meeting on Thursday, 25th of July 2019, in Frankfurt after the euro zone inflation data -of June- was higher than the expectable at 1.3%, while ECB’s target rates –just below 2%- remain controllable.

Following the meeting, Marion Amiot and Sylvain Broyer, S&P Global Ratings economists, expected the ECB to cut its deposit rate by 10 basis points and potentially resume quantitative easing in the form of 15 billion euros ($16.85 billion) in asset purchases of October.

Key points:

According to Amiot and Broyer, “The European economy is still evolving at low gear and two speeds, with robust service activity on the one side but no obvious recovering in manufacturing on the other”.

German and Italian economies, considered that Europe’s premier manufacturing powerhouses, are near to a recessionary situation, as well as vulnerable to several external risks, such as Brexit, the U.S.- China trade war, Iran, a Chinese economic slowdown and potential U.S. tariffs on European car imports.

S&P economist’s project, concerning that manufacturing weakness is likely to weigh on the robust service sector, suggesting the possibility for “more downward revisions to growth and inflation forecasts this year”.

The current ECB interest rates on its main refinancing operations, marginal lending facility and deposit facility sit respectively at: 0%, 0.25% and -0.40%.

If the euro strengthens on looser policy by the U.S. Federal Reserve System and the market-based inflation expectations do not increase markedly from their current lows, then a downward bias would allow ECB to cut rates.

Since ECB lengthened the timeframe of its forward guidance by one year in June, this meeting would be too early to alter that aspect of the guidance again.

Finally, Amiot and Broyer do not expect that ECB will be able to increase rates again, at least not before the second quarter of 2021.

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