(Bloomberg) -- Goldman Sachs says weaker economic growth will lead both the European Central Bank and the Bank of England to cut interest rates at a faster pace than it previously expected.
The bank now sees the ECB delivering consecutive rate reductions starting in December, as opposed to one every other meeting, and lowered its terminal rate forecast by a quarter point to 2%, Jan Hatzius, chief economist at Goldman, wrote in a note.
For the BOE, Goldman expects consecutive cuts starting in November — a faster pace than before — though it kept its forecast for the terminal rate unchanged at 3%, which is already below the 3.25% priced in by the market.
“Somewhat sticky recent inflation data seems to have strengthened the hawks’ resolve to move slowly,” Hatzius wrote, referring to ECB policymakers. “But as inflation comes down further and growth continues to struggle, we now see sequential cuts from December.”
Hatzius said they downgraded their euro-area growth outlook on the back of weakness in the manufacturing sector, especially in Germany.
Inflation in both Europe and the UK have proved sticker than expected largely because of stronger wage growth. That’s tempered bets on aggressive easing this year, with officials also taking a more cautious stance. But that narrative appears to be changing amid evidence the economy is weakening.
Data this week showed UK pay growth cooled to a two-year low, while the economy stagnated for a second month as the rapid recovery from recession loses momentum. In Europe, growth is stumbling and manufacturing activity is still in the doldrums, with households failing to take up the slack.
Goldman’s call comes hours before the ECB sets policy on Thursday. Hatzius expects the central bank to cut the deposit rate by 25 basis points to 3.5%, in line with economists surveyed by Bloomberg.
The BOE’s next meeting is on Sept. 19, and economists polled by Bloomberg expect policymakers will keep the key rate unchanged at 5% after delivering a quarter-point cut last month.
--With assistance from James Hirai.
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