European Central Bank may cut rates in September, December

ISTANBUL

The European Central Bank (ECB) is most likely to cut rates in September or December, while it’s expected to pause its rate cut cycle in July.

Uncertainties in the eurozone because of US tariffs are expected to prompt the ECB to pause cutting rates for now and adopt a wait-and-see approach.

Peter Vanden Houte, chief economist at the ING Group, told Anadolu that the ECB’s monetary policy is “in a good place now” and is not restrictive anymore.

“However, the latest economic developments seem to suggest some deflationary pressure: the euro has seen a substantial appreciation since the beginning of the year; at the same time, higher than expected US import tariffs on European goods might kill the timid recovery in the European manufacturing sector — this would plead for some additional stimulus,” he said.

Houte noted that the ECB considered medium-term inflation risks, as inflation may rise again in Germany next year with significant fiscal stimulus measures.

“All things considered, a wait-and-see approach remains the most probable course of action for the ECB next week,” he said. “With the next potential tariff escalation not expected until Aug. 1, there’s little reason for a preemptive rate cut now, at the same time, the strengthening of the euro since the last meeting has not been strong enough to justify a rate cut next week.”

Hadrien Camatte, senior economist for France, Belgium and the eurozone at Natixis, told Anadolu that the ECB is “well positioned” to assess the current environment and the risks in the uncertain atmosphere.

“Given the upcoming data by September, we believe that the ECB will have enough information to proceed with a new and final rate cut in next September -- we attach a probability of 20% to the adverse scenario, paving the way to another 25bp (basis point) policy rate cut at the December meeting should the 30% US tariffs be applied, and the European retaliatory measures be not proportioned,” he said.

Bas Van Geffen, senior macro strategist at Rabobank, told Anadolu that the ECB is expected to maintain its deposit rate unchanged at 2% this month, and subsequent meetings may not see any cuts unless the economic outlook deteriorates significantly.

“The key risk is obviously trade policy, but negotiations with the US are probably still ongoing when the ECB meets again -- or alternatively, there will be a deal between the EU and the US,” he said. “In both of these cases, there is no reason for the central bank to cut policy rates.”

Marco Wagner, senior economist at Commerzbank, told Anadolu that the ECB is likely to wait until September, keeping rates unchanged in July, while expecting the eurozone’s inflation to keep falling in the following months.

“According to our quantitative model, inflation is likely to fall significantly below the ECB's 2% target, at least for a time -- lower energy prices compared with last year should be the main factor here,” he said. “The appreciation of the euro is also likely to contribute to a decline in inflation, as it makes imports cheaper.”

“The continuing weakness of the eurozone economy also argues in favor of further monetary easing,” he added.​​​​​​​