Morgan Stanley: The European Central Bank is expected to remain on hold this week, and there is still uncertainty regarding a rate cut in October

According to the Zhitong Finance APP, JPMorgan Chase stated that the European Central Bank is almost certain to maintain the current deposit rate of 2% at the upcoming monetary policy meeting. The bank pointed out that despite uncertainties, the central bank is in a "favorable position" and has a weak willingness to act in the short term. However, the future direction of policy remains influenced by multiple factors such as economic data, inflation changes, and external environments, and there is uncertainty about whether a rate cut will be implemented in October.

Economist Greg Fuzesi stated in a report that although ECB staff had predicted in June that core inflation would fall below 2% in the medium term, recent economic data has not been strong enough to prompt the Governing Council to take further action immediately.

JPMorgan Chase expects President Lagarde to slightly downplay her "favorable position" statement at this meeting, instead emphasizing the "uncertainty" of the short-term economic outlook to better align with her policy stance of "data dependence and meeting-by-meeting decision-making." However, even if the latest staff forecasts may still imply a dovish tendency, the likelihood of the Governing Council explicitly signaling a rate cut is extremely low.

The bank maintains its forecast that the European Central Bank will implement another rate cut in October, but also acknowledges that if subsequent economic data fails to meet the "trigger conditions" for the ECB to initiate a rate cut, it cannot rule out the possibility of the central bank delaying or even canceling this last rate cut.

New Forecast Framework: Slight Adjustments, Easing Remains

The latest quarterly economic projections (SEP) to be released at this meeting will provide a key framework for discussion. JPMorgan Chase expects the adjustments to be relatively moderate, but overall will still lean towards easing.

Growth: Upward Revision of Third Quarter Expectations, Short-term Adjustments Do Not Change Long-term Recovery Trend

In the June forecast, ECB staff expected the average annualized GDP growth rate from the first to the third quarter of 2025 to be 0.6%, with the third quarter expected to experience a 0.3% quarter-on-quarter contraction (seasonally adjusted annualized rate) due to a "pullback after the earlier policy stimulus." However, based on the details of GDP in the first half of the year, Ireland's GDP remained stable due to "normal fluctuations," and the likelihood of GDP contraction in the third quarter has significantly decreased even with a pullback in pharmaceutical exports.

JPMorgan Chase assesses that ECB staff will raise the GDP expectations for the third quarter, most likely no longer predicting contraction, and will only retain the description of "short-term slowdown in growth." Although the August Purchasing Managers' Index (PMI) showed a slight rebound, it has not fully validated the June prediction of a 1.3% quarter-on-quarter annualized growth rate for the fourth quarter.

Overall, the Eurozone economy has shown strong resilience, and the conclusion of the US-EU trade agreement has also reduced some trade uncertainties. However, the tariff levels locked in by this agreement are higher than expected in June, combined with a stronger euro exchange rate, which may exert some pressure on economic growth in the coming quarters. JPMorgan Chase expects the ECB to slightly lower growth expectations for the next few quarters but will not change the overall trend of "gradual economic recovery starting at the end of the year."

Inflation: Core Inflation Maintains Near Target, Difficult to Reach 1.9% Target by 2027

From the inflation data, the current trend is relatively close to the ECB's June forecast. In the third quarter of 2025, the overall inflation rate is expected to be 2.1% year-on-year, which is 0.2 percentage points higher than the June forecast; the core inflation rate is expected to be 2.3% year-on-year, in line with expectations, and the breakdown of goods and services inflation also aligns with previous judgments In terms of labor costs, the average employee compensation in the second quarter of 2025 is expected to grow by 3.9% year-on-year, higher than the anticipated 3.5%, partly due to upward revisions of previous quarterly data. However, this cost pressure may be offset by factors such as the strengthening of the euro and slight adjustments to policy interest rate assumptions, and forward-looking wage tracking indicators show that wage growth is still exhibiting a "slowing trend."

JP Morgan predicts that the core inflation rate forecast for 2026 and 2027 will still be "rounded to 1.9%," but when precise to two decimal places, there will be a downward adjustment, with a risk of further dropping to 1.8%. Even so, this level of inflation is still insufficient to drive the overall inflation rate down to the target of 1.9% by 2027.

The bank points out that if the above predictions hold, current policies can only cover the effect of "half a rate cut," and more accommodative policies are needed to fully meet core inflation targets.

Uncertainty Remains, Policy Path to be Clarified After the Meeting

JP Morgan finally emphasizes that the current economic outlook for the eurozone is still shrouded in uncertainty. Factors such as the impact of previous stimulus policy withdrawals, businesses' adaptation to higher tariffs, the trajectory of the U.S. economy, and the potential significant impact of individual inflation data on market sentiment are all reasons for the European Central Bank to remain cautious.

The European Central Bank is currently more inclined to "wait and see," assessing how economic data will evolve at the 2% interest rate level. The bank states that after next week's meeting, it will more clearly evaluate the uncertainty in the European Central Bank's policy "reaction function," especially regarding its tolerance for "inflation slightly below target," and subsequently determine whether the rate cut plan for October will be adjusted