- The ECB staff is likely to revise its inflation forecast downward
- After another 25-basis point cut the ECB is likely to pause, but will resume easing in September
In May, manufacturing PMIs remained largely unchanged and still slightly below 50, indicating continued weakness. Services PMIs came in below expectations and slipped below the 50 mark, with notable weakness in Germany. We estimate that euro area headline inflation declined to 2.1% in May, while core inflation eased to 2.5%. Further disinflation remains likely, driven by both cheaper energy, a stronger euro, and easing in labour costs. We forecast that the euro area inflation will reach the ECB’s target of 2% already this summer. The ECB staff will also update its inflation and growth forecasts next week – while significant revisions are unlikely, downward adjustments to this year’s GDP growth and, especially, inflation are expected, paving the way for further easing if necessary.
The ECB is widely expected to cut interest rates by 25 basis points during the next week’s meeting, bringing the deposit interest rate to 2.0%. The Governing Council is likely to signal that monetary policy is no longer restrictive and will pause further interest rate cuts. It will have three full months before the September meeting to assess the impact of changes in US trade policy. We maintain our forecast that, following the June cut, the ECB will lower interest rates two more times this year – in September and December – bringing the deposit rate to 1.5%.
