The European Central Bank (ECB) will next week open the door to an interest rate cut for September, economists have predicted.

The ECB’s Governing Council is set to meet next Thursday in Frankfurt after euro zone inflation data for June came in higher than expected this week at 1.3%, but remained well below the central bank’s target rate of just below 2%.

The ECB is juggling political uncertainty and an economy sluggishly battling external weaknesses, which have led to a dovish tone of late from its President Mario Draghi.

S&P Global Ratings economists Marion Amiot and Sylvain Broyer expect the ECB to cut its deposit rate by 10 basis points following its September meeting, and potentially resume quantitative easing (QE) in the form of 15 billion euros ($16.85 billion) in asset purchases in October. The deposit facility rate defines the interest banks receive for depositing money with the central bank overnight, and has been negative since June 2014.

“The European economy is still evolving at low gear and two speeds, with robust service activity on the one side but no obvious recovering in manufacturing on the other,” Amiot and Broyer said in a note Thursday.

The German and Italian economies, considered Europe’s premier manufacturing powerhouses, are hovering close to recessionary territory and remain susceptible to several external risks, such as Brexit, the U.S.-China trade war, Iran, a Chinese economic slowdown and potential U.S. tariffs on European car imports.

The S&P economists project that manufacturing weakness is likely to weigh on the robust service sector, suggesting we could see “more downward revisions to growth and inflation forecasts this year.”

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The current ECB interest rates on its main refinancing operations, marginal lending facility and deposit facility sit at 0%, 0.25% and -0.40% respectively. Against the backdrop of a global slowdown and weak inflationary pressures, S&P expects the ECB to adjust its forward guidance next Thursday to accommodate a rate cut of 10 basis points (bps) in September.

“A downward bias would allow the ECB to cut rates as soon as September 2019, if the euro strengthens on looser policy by the U.S. Federal Reserve System and market-based inflation expectations do not increase markedly from their current lows,” the note explained.

It added that because the ECB lengthened the timeframe of its forward guidance by one year in June, this meeting would be too early to alter that aspect of the guidance again. However, S&P anticipates that the ECB will “have more work to do in the future on its communication” given the slow development of the euro zone economy.

Amiot and Broyer do not expect the central bank to be able to raise rates again until at least the second quarter of 2021.

US impact

Economists at UBS have also penciled in a deposit rate cut of 10 basis points on September 12 and a further 10 basis points on December 12, following the stark change in U.S. trade and monetary policy outlook amid a drawn out trade war with China. The U.S. Federal Reserve has looked increasingly likely to cut interest rates, with many analysts now pricing in two cuts by the end of the year.

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“This headwind to the global economy has prompted UBS to pencil in a U.S. rate cut of 50 basis points (bps) as soon as 31 July. Were the ECB not to follow up with monetary easing of its own, we think the euro could appreciate excessively against the U.S. dollar,” UBS Chief Euro Zone Economist Ricardo Garcia said in a note on Tuesday.

As such, UBS anticipates that the ECB will go further than simply removing the tightening bias from its interest rate forward guidance next Thursday, and expects Draghi to deliver a dovish message.

The reasoning behind the prediction of two rate cuts of 10 basis points instead of one worth 20 basis points, the note explained, was that the ECB has thus far cut in increments below the zero interest rate mark. Additionally, recalibrating policy over a longer timescale allows more time for fine-tuning.

Garcia highlighted that the additional rate cuts would further hurt banks and bank loan creation, with the European banking sector already heavily embattled, and therefore he anticipates that the ECB will implement deposit tiering in order to mitigate the damage. Banks traditionally are hurt by ultra-low rates as it limits their ability to find yield and log profits.

“This would reduce the increased cost of bank’s excess reserves at the ECB’s deposit facility,” the note explained.

“What’s more, a lower ECB deposit rate will mean the forthcoming TLTROIII becoming more attractive.”

TLTROs (targeted long-term refinancing operations) are loans intended to make the euro zone’s banks lend more to the real economy. They have a negative deposit rate, so they would pay lenders for taking the cash, meaning it’s a strong incentive for the banks to use them.

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The ECB’s third iteration of TLTRO is due to start in September, with the interest set at 10 basis points.