ECB may wait until December to make final rate cut: survey

Business Times

18-07-2025

[FRANKFURT] The European Central Bank (ECB) can delay its final interest-rate cut until December without investors concluding in the meantime that easing is over, a Bloomberg survey of economists showed.
A majority continues to expect the last quarter-point reduction in the deposit rate, to 1.75 per cent, will come in September after a pause next week. At the same time, half of the respondents think the ECB can sit out three meetings before traders assume borrowing costs are at their floor. That's longer than before, due to uncertainty over trade.
This month's timeout has been well flagged by officials led by President Christine Lagarde, who sees the ECB in a 'good place' to navigate any challenges to economic growth and inflation that may arise. But there's less of a consensus beyond the summer.
While Executive Board member Isabel Schnabel considers the bar for another cut to be 'very high', Finland's Olli Rehn and France's Francois Villeroy de Galhau fret that price gains will fall short of 2 per cent, particularly if the euro strengthens more against the US dollar.
July's decision 'should be relatively straightforward, with most Governing Council members likely to back rates being on hold', said Fabio Balboni, senior euro-zone economist at HSBC. 'While some will see this as a pause, others will see it as the end of the cutting cycle. This could generate some discussions about the rates path beyond July.'
About a quarter of survey participants reckon the ECB is already done lowering rates. Almost half predict a last move in September, while 21 per cent see it arriving in December.
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That's the month when Mariano Valderrama, Intermoney's chief economist, forecasts the first hike. While his call for a rate increase is the earliest, roughly one in five respondents expect one before the end of 2026.
Whichever path policymakers choose will depend largely on trade talks between Brussels and Washington. After the European Union signalled it was close to a deal, US President Donald Trump threatened tariffs of 30 per cent.
'The development in trade negotiations between the EU and the US is the most important thing to watch, as this can tip the current balance between domestic strength and foreign demand,' said Julie Ioffe, European macro strategist at TD Securities. With an agreement unlikely by the time the ECB meets next week, the Governing Council will be 'unable to signal whether an additional cut is necessary or if the terminal rate has been reached'.
The main challenge, said SEB's Jussi Hiljanen, is to 'avoid guiding markets either towards or away from another rate cut'.
Traders see a less than 50 per cent chance of a decrease in September. A reduction is almost fully priced by year-end.
In September and December, policymakers can consult fresh economic forecasts for the 20-nation euro zone. Last month, the ECB predicted inflation will settle at 2 per cent in 2027 after averaging just 1.6 per cent next year.
Analysts see risks to June's projections as largely balanced. They are equally divided on whether over- or undershooting the inflation target is likelier.
'Downside risks are probably greater near term; upside risks for inflation may be greater by the medium term,' said Dennis Shen, an economist with Scope Ratings.
He argues that cheap goods from China and other nations hit by US tariffs would probably damp price pressures if they are redirected to Europe, with the euro's ascent also having a disinflationary impact.
Even after paring some gains, the single currency is up almost 12 per cent against the US dollar this year, trading near US$1.16. ECB vice-president Luis de Guindos told Bloomberg this month that US$1.20, a level not seen in more than four years, is where the economy may run into trouble.
Poll respondents appear to have a higher pain threshold. Only about a quarter share Guindos's view, with the rest citing levels as high as US$1.35. Many said the pace of appreciation is as if not more important than the exchange rate itself in determining downside risks to prices. There are upside dangers, too, however.
'Increased public spending risks keeping core inflation above target levels,' said Sylvain Broyer, an economist at S&P Global Ratings. 'The ECB should not assume core inflation will easily return to and remain at its target in the coming years.' BLOOMBERG