In a significant economic development, a Reuters poll has shown that the European Central Bank (ECB) is likely to conclude its year-long cycle of interest rate cuts with a final reduction expected in September. This expectation, shared by more than 53% of economists surveyed, marks a shift in consensus compared to last month, when there was no clear agreement on the rate outlook for the remainder of the year.
One of the main drivers behind this forecast is that the ECB has already carried out eight 25-basis-point rate cuts, four of which occurred this year alone, bringing the main interest rate down to 2.0%. Analysts suggest that this aggressive monetary policy may have reached maturity, especially with inflation dropping to 1.9% last month and the first time it has fallen below the 2% threshold in eight months.
Despite these positive indicators, some concerns remain, particularly regarding global trade policies. With no agreement yet between the European Union and the United States on new tariffs announced by former U.S. President Donald Trump in April, Europe may face a minimum 10% tariff on its exports. Some economists believe these tariffs could have a deflationary impact on the eurozone, potentially justifying another rate cut during the summer.
In this context, economist Julie Ioffe of TD Securities pointed out that Europe's economic strength does not solely rely on international capital inflows but is also bolstered by a noticeable increase in domestic demand. “We’re seeing private consumers ramping up their spending, along with government expenditure that’s where Europe’s true potential lies,” she said.
On the growth front, the survey indicated that the eurozone economy is expected to expand by 1.0% this year a slight upward revision from the 0.9% forecast in May. Growth is projected to increase to 1.1% next year and reach 1.5% by 2027. As for the euro, it has gained over 12% against the U.S. dollar since the beginning of the year, which has contributed to downward pressure on inflation. It is expected to rise an additional 1.4% over the coming year to reach $1.18, according to a separate Reuters poll.
When asked about the threshold at which the rising euro might become a concern for monetary policy, the median estimate among a smaller group of economists was $1.24. Dean Turner of UBS Global Wealth commented, “I think we’d need to reach $1.25 and beyond before it becomes a real problem. We have to remember that the move from $1.02 to around $1.15 was simply from an undervalued euro to something closer to fair value.”
In summary, the ECB appears to be approaching the end of its monetary easing cycle with calculated caution, while keeping a close watch on inflation trends and currency movements amid ongoing political and trade-related challenges that may influence economic stability across the eurozone.
