The weight of opinion is building that the ECB will return to some sort of easing and cut rates as early as September, after the ECB was reported to be mulling changing its inflation target, and S&P Global Ratings projected some sort of stimulus, while a poll by Reuters suggested the central bank will cut the deposit rate.
Europe’s economy is running at “low gear and two speeds” which will pave the way for the ECB to “to cut rates as soon as September”, S&P said, seeing no rate until the middle of 2021.
“At this stage, there is more risk that weakness in the manufacturing sector is being transmitted to the service sector than the other way around. The persistence of several external risks is becoming a risk of its own,” ten ratings firm said.
Expectations for ECB rate cut built further after a Bloomberg report quoted sources as saying ECB staff were informally studying whether a more flexible target might be more appropriate.
That would potentially allow inflation to stay higher for longer than the bank would normally countenance and helped lower the cost of eurozone government yields even further.
And the Reuters poll of economists suggested the ECB will cut its deposit rate in September, but who do not expect a turnaround in the eurozone’s economic fortunes any time soon.
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 -0.50%, 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.
The poll of over 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%, eurozone inflation is lower than where it stood when the central bank stopped its €2.6 trillion asset purchase programme in December. Meanwhile, sterling clawed back some of its large losses of recent weeks after stronger-than-expected UK retail sales figures. It traded close to 89 pence -- after plunging below 90 pence against the euro earlier this week.