06:52 AM EDT, 09/09/2024 (MT Newswires) -- Mitsubishi UFG expects the European Central Bank to cut the rate on Thursday for the second time in the current easing cycle by 25bps lowering the policy rate to 3.50%.

The rate cut would follow the decision to leave the rate on hold at the last meeting in July. The decision to cut the rate again this week should be supported by the updated ECB staff forecasts that could be revised modestly lower both for inflation and growth in the eurozone, wrote the bank in a note to clients.

The previous ECB staff forecasts from June for inflation were set at 2.5% for this year, 2.2% in 2025 and 1.9% in 2026, while the gross domestic product forecasts were set at 0.9% for this year, 1.4% in 2025 and 1.6% in 2026. However, the forecast revisions are unlikely to be sufficient on their own to encourage the ECB to speed up the pace of rate cuts, stated MUFG.

The ECB will have been encouraged by the release recently of its latest negotiated wage data for the eurozone which revealed a sharper slowdown to 3.6% in Q2 from 4.7% in Q1, pointed out the bank. ECB Chief Economist Philip Lane stated the next policy meeting in October, while it remains more likely that the ECB will wait until December to deliver the third rate cut in the cycle when it will again have access to updated ECB staff forecasts, added MUFG.

The bank doesn't expect the ECB to speed up rate cut plans in response to the faster pace of the United States Federal Reserve easing. For the ECB to speed up the pace of rate cuts, it will require clearer evidence that inflation is falling back more quickly to its target and that the eurozone economy/labor market is much weaker than expected.

After returning to modest growth in the first half of this year, MUFG estimates the economic recovery to continue through the rest of this year supported by rising real disposable income as the negative energy price shock continues to ease.

The disappointing performance of Germany's economy does though remain one area of concern, according to the bank. Economic growth contracted again in Q2 for the third time out of the last five quarters.