The European Central Bank's dovishness boosts loose monetary policy to resist recession, with interest rates possibly falling below 2% in September.

Economists surveyed indicated that due to the expected inflation rate to be below the European Central Bank's target in early 2026, the bank will lower borrowing costs to below 2% this year, a larger decrease than previously expected. The monthly survey showed that after seven interest rate cuts of 25 basis points each, it is likely that there will be further cuts in June and September. This will reduce the deposit rate from the current 2.25% to 1.75%. In the previous survey, respondents believed that the deposit rate would remain at 2% throughout the survey period. However, analysts predict that the European Central Bank will raise interest rates back to 2% in the first quarter of 2027, keeping the forecast for the end of the survey period (third quarter of 2027) unchanged. Observers of the European Central Bank expect two more interest rate cuts this year. Analysts have lowered their inflation expectations, currently forecasting an average price increase of 1.7% and 1.8% in the first two quarters of 2026, compared to the previous expectation of 1.9%. Officials have recently made optimistic comments on inflation and are prepared to further reduce borrowing costs, with the next move possibly in June. Due to the weak European economy, particularly affected by US President Trump's trade tariffs, the market expects two to three more interest rate cuts this year. Last Friday, the Governor of the Bank of Lithuania, Gediminas Simkus, stated that another interest rate cut in June is "necessary" due to the "clear anti-inflationary forces" such as falling energy prices and a strong euro affecting the eurozone economy. He added that there may be another interest rate cut after June, but the timing is uncertain. He said this measure could be implemented in July, September, or even December. The Governor of the Bank of Finland, Olli Rehn, also stated on Friday that if the European Central Bank's new forecasts confirm a slowdown in inflation and a weakening growth trajectory, he will support an interest rate cut next month. However, European Central Bank Executive Board member Isabel Schnabel urged caution on Friday, stating that in an environment of rising uncertainties, "prudent" policies and keeping rates near the current level are most appropriate. The European Central Bank's forecast in June will play a crucial role in these decisions. In March, the European Central Bank forecasted economic growth of 0.9% for this year, 1.2% for 2026, and 1.3% for 2027. Chief Economist Philip Lane stated last month that trade tensions have dampened the outlook, but "it's important to say it's just a modest downgrade" as the economy is still growing. The Eurozone unexpectedly saw output grow by 0.4% in the first quarter, double the previous period's growth. The Eurozone inflation rate is approaching the European Central Bank's target of 2%. In terms of inflation, the European Central Bank's March forecast predicted that the inflation rate for 2026 and 2027 will slow from this year's 2.3% to 1.9% and 2.0%, respectively. Some policymakers have hinted at a possible revision of these expectations, fueling discussions about inflation potentially falling below the European Central Bank's 2% target once again. However, the inflation rate for April unexpectedly stabilized at 2.2%, with a key indicator rising to 2.7%, significantly higher than analysts' predictions.