With the European zone's activity indicators shockingly on the downside and concerns about inflation easing, HSBC expects the European Central Bank (ECB) to cut interest rates faster than expected to support the region's economy.
Data released earlier this week showed that business activity in the European zone fell sharply and unexpectedly this month, with the decline appearing to widen as Germany, Europe's largest economy, saw a deeper decline, while France, the bloc's second-largest economy, returned to state of decline.
HCOB's preliminary composite Purchasing Managers' Index (PMI) for the European zone, compiled by S&P Global, fell to 48.9 this month from 51.0 in August, below the 50 level that separates growth from contraction for the first time since February.
"The risk of a sharper decline in activity has clearly increased," HSBC analysts said in a note dated September 25. “Thus, a risk-based approach in setting monetary policy may favor earlier and faster easing. With the deposit rate currently at 3.50%, it may be reduced several times while maintaining a tight policy.”
In addition, disinflationary news from commodities and the euro, a favorable path for wages and inflation expectations, as well as the fact that the eurozone's largest economy is slowing strengthen the case for more short-term easing, the bank added.
In its September forecast, the ECB expects headline inflation to be below target in 2026.
A further decline in demand forecasts could increase the risk of inflation being lower than target, HSBC said. "So even if the supply side of the economy remains weak and the labor market is only gradually cooling, more policymakers may think that some reduction in 'insurance' rates may be necessary."
HSBC now expects the ECB to cut rates by 25 basis points at each meeting from October to April 2025, when the key deposit rate reaches 2.25%.
"Previously, we expect reductions at every other meeting until the main deposit rate reaches 2.50% in September 2025."
