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The European Central Bank will reduce its deposit rate in September after announcing its intention to do so this month, according to economists polled by Reuters who do not expect an upcoming recovery in the economic situation of the euro area.
Major central banks on both sides of the Atlantic are under pressure to loosen monetary policy to prevent the collapse of inflationary expectations as global growth slows, trade protectionism increases, and weak economic data.
When asked what the ECB was likely to do at its July meeting, two-thirds of economists said the central bank would alter its easing expectations.
With inflation well below the central bank target and not expected to pick up soon, the ECB is expected to reduce its deposit rate by 10 basis points to a record low of -0.50. % in September.
"We do not think it will be enough to put inflation back on target. Clearly, a 10-basis-point interest rate move does not move the dial, "said Andrew Kenningham, chief economist for Europe at Capital Economics.
"But the board of governors will want to let it know that it can do more. This … can have a marginal impact on monetary conditions. But no, I do not think that will be enough. "
Indeed, the poll conducted by Reuters from July 4 to 17 among more than 100 economists has shown that growth prospects and inflation in the euro area – and for most major economies in the region – were at best unchanged or downgraded from previous surveys.
At 1.3%, euro area inflation is lower than when the central bank ended its € 2.6 trillion badet purchase program in December.
While a majority of economists do not expect the ECB to revive badet purchases – known as quantitative easing – or QE – this year, nearly 40% of respondents expected them to do so, compared with around 15% last month.
"A rate reduction will not be enough. Even if we think that the ECB will reduce rates, we see this as a political decision that will precede the restart of QE, "said Daniele Antonucci, chief economist at Morgan Stanley for the euro area.
It's time to take the lead
The European Commission reduced the eurozone's growth and inflation outlook last week, citing uncertainty over US trade policy.
Quarterly economic growth is expected to have slowed to 0.2% in the last quarter, and the consensus suggests a growth rate of 0.3% to 0.4% for each quarter up to the previous quarter. at the end of next year.
Inflation, which the ECB is targeting at just under 2%, is expected to average 1.3% this year and is unlikely to reach the target at any point in the forecast horizon until 2021.
This should give the ECB a reason to move forward with the stimulus measures outlined in President Mario Draghi's speeches last month.
Benoît Coeure, a member of the ECB's governing board, made the remarks in a speech on Wednesday.
"For the future, the Governing Council is committed to acting in the event of adverse eventualities and is also willing to adjust all its instruments, as appropriate, to ensure that inflation continues to progress in a sustainable manner, in line with to the Board of Governors' inflation target, "said Coeure.
The backdrop of the US-China trade war and its aftermath, as with many other global central banks easing or contemplating such a policy, is the ECB. The euro zone is particularly vulnerable because its economy is heavily dependent on exports.
"I would say that the dominant story remains that of the uncertainty of trade and that it will probably slow down the prospects of recovery over the next six months," said Bert Colijn, senior economist at ING.
Of a total of 63 economists who answered a separate question, with the exception of four of them, the head of the International Monetary Fund, Christine Lagarde, who will replace Draghi after his departure in October, will maintain his current policy.
"I think she is not bad at ease in this position … because she is a strong supporter of unconventional politics," said Frederik Ducrozet, strategist at Pictet Wealth Management.
Source: Reuters (By Richa Rebello, Analysis and Survey by Tushar Goenka and Manjul Paul, Edition by Ross Finley and Catherine Evans)
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