The European Central Bank (ECB) will meet again later this month, and Goldman Sachs expects the central bank to ease monetary policy again after starting a cycle of interest rate cuts in June.
ECB officials are generally of the view that incoming data broadly confirms the fundamental scenario and that policy rates could be cut further if the process of inflation decline remains on track, analysts at the bank said in a note dated Aug. 30.
Furthermore, some experts noted that the recent slowdown in wage growth was good news and some argued that the increased risks to the growth outlook had further strengthened the case for easing policy constraints.
"Overall, we think that the latest comments indicate a moderate signal change from 1-2 additional cuts this year before the summer holidays to 2 more cuts, with little desire to cut the policy rate at a faster pace at this stage," said Goldman Sachs.
Forward-looking indicators and comments from several ECB officials suggest a slight dip to near-term growth, which would see 2024 and 2025 growth down -0.1pp to 0.8% and 1.3% respectively.
"We expect core inflation to be revised up +0.1pp to 2.9% in 2024 and +0.1pp to 2.3% in 2025 given the recent stronger pace of growth, but to remain unchanged in 2026," Goldman added. "Lower oil prices and a stronger euro are expected to be offset by lower rates and higher gas prices, which will cause projections for headline inflation to remain unchanged in 2024, 2025, and 2026."
With all this in mind, "we continue to expect the Governing Council to implement the widely expected second 25 basis point reduction on September 12 but with little change in its communication," Goldman said.
“Specifically, we expect the Council to maintain a data-dependent approach and meeting after meeting without clear guidance on the future policy path. We maintain our forecast for a quarterly reduction to a final rate of 2.25% but see risks leaning towards a sequential pace, especially in the first half of 2025.”
