Easier monetary policy is now the base case for the European Central Bank according to analysts at RBC Capital Markets- They think the central bank will lower its deposit rate further into negative territory over the second half of this year.

Key Quotes:

“Recent data suggests the euro area’s pickup in growth early this year was short-lived. A slowdown in the manufacturing sector is becoming entrenched, particularly in Germany. Industrial production likely returned to drag on growth in Q2, and recent PMI data show little momentum heading into Q3. Retail sales have also softened in recent months, though data for the broader services sector has been more positive. Services PMIs ticked higher in all major euro area economies in June, with the overall index hitting a year-to-date high.”

“Easing in political uncertainty and less unrest in France and Italy has likely helped in that regard. But despite signs of domestic resilience, growing external headwinds are likely to keep the euro area from growing at an above-trend rate. We have lowered our 2019 GDP forecast for the currency bloc to 1.1%, which would be the slowest in six years.”

“A subdued growth outlook, along with persistently low inflation and declining inflation expectations, has the ECB contemplating further easing. In particular, President Draghi noted that more stimulus should be expected unless economic conditions improve (he previously said conditions would need to deteriorate to warrant further action).”

“We now expect the ECB will lower its deposit rate from -0.4% to -0.6% over the second half of this year via 10 basis point rate cuts in September and December. It is also likely to signal that further QE is on the table, though we don’t think asset purchases will restart in the near-term.”