By Indradip Ghosh

BENGALURU (Reuters) – The European Central Bank (ECB) is set to lower its deposit rate by 25 basis points (bps) on December 12, as anticipated by all but two out of 75 economists surveyed by Reuters. They also predict at least 100 bps more in cuts next year, amidst concerns over economic slowdown and potential U.S. tariffs.

Amidst the recent political upheaval in Europe, particularly following the French government collapse, the ECB is unlikely to adjust its policies immediately. The proposed tariffs by U.S. President-elect Donald Trump could complicate the ECB's policy decisions for the upcoming year.

Most analysts have maintained their previous rate predictions, including those extending to end-2025, as they await clarity on ongoing developments. The December 2-5 Reuters poll indicated that 73 economists foresee another 25 bps cut next week, marking the fourth such adjustment this year, while two anticipate a 50 bps reduction.

Jan von Gerich, chief analyst at Nordea, stated, "A 25 bps move remains our baseline…the uncertainties will likely keep the message soft and open-minded." He noted that Trump's ability to heighten uncertainty in Europe is substantial, particularly since both Germany and France lack strong governance.

Speculation had suggested the possibility of a larger cut, yet ECB officials seem to discount that prospect. Governing Council member Robert Holzmann expressed that a cut of 0.25 percentage points appears more plausible based on current data.

Strikingly, 80% of surveyed economists expect two additional deposit rate cuts in the next quarter, with over half predicting a total reduction to 2.00% by the second quarter. Additionally, more than 75% anticipate rates at 2.00% or lower by end-2025, reflecting an increasing likelihood of further cuts.

Interest rate futures are indicating over 150 bps of reductions by the end of 2025, twice those expected for the U.S. Federal Reserve, implying a continued weakness for the euro.

TRADE THREAT TRUMPS DOMESTIC POLITICS

An overwhelming majority of economists predict that Trump's proposed tariffs will significantly impact the European economy in the years ahead. James Rossiter from TD Securities mentioned that these tariffs have led to a considerable downgrade in their growth forecast for 2025, indicating a lack of sympathy from Trump towards the EU.

Concerns about geopolitical risks involving France, Germany, and the U.S. could push the ECB to lower rates to 1.5% if multiple risks materialize. The eurozone's projected growth is set at 1.0% for 2025 and 1.2% for 2026, which is a slight downgrade from previous forecasts. Inflation, recorded at 2.3% in November, is expected to return to the 2% target by the second quarter of 2025 and stabilize around that target until at least 2027, based on median forecasts.

ECB staff will revise their economic forecasts during the December meeting.

(Other stories from the Reuters global economic poll)