Many economists surveyed by the Financial Times warn that the European Central Bank is too slow to cut interest rates to support the eurozone’s flagging economy.
Almost half of the 72 euro area economists surveyed, 46%, were confident that the ECB’s monetary policy was “on the right track”, compared to 43% who said the central bank’s He said it was “outdated” and out of sync with economic fundamentals. ”.
The rest either didn’t know or didn’t say so, but none of the economists thought the ECB was “ahead of the curve.”
The ECB has cut interest rates four times since June, dropping interest rates from 4% to 3% as inflation fell faster than expected. During this period, the economic outlook for the currency area continued to deteriorate.
ECB President Christine Lagarde has admitted that interest rates will need to be cut further next year, given the outlook for lackluster economic growth in the euro zone.
According to the IMF’s latest forecasts, the currency bloc’s economy will expand by 1.2% next year, compared with 2.2% for the United States. Economists polled by the FT were even more pessimistic about the eurozone, expecting growth of just 0.9%.
Analysts expect that the divergence in growth rates will result in euro zone interest rates at the end of the year that are significantly lower than U.S. borrowing costs.
Fed rate setters expect to cut borrowing costs by a quarter of a point just twice next year. Markets are divided on whether the ECB expects to cut rates by 25 basis points four to five times by the end of 2025.
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Eric Doll, a professor of economics at the IÉSEG School of Management in Paris, said it was “clear” that “downside risks to real growth” in the eurozone were increasing.
“The ECB has been too slow in lowering interest rates,” he said, adding that this was having a negative impact on economic activity. Doe said it was “increasingly likely” that inflation would fall below the ECB’s 2% target.
Carsten Junius, chief economist at Bank J. Safra Sarasin, said the ECB’s decision-making overall seems slower than that of the Federal Reserve or the Swiss National Bank.
Junius blamed Lagarde’s “consensus-oriented leadership style” and “the large number of decision-makers on the governing council,” among other factors.
Erik Nielsen, group chief economist at UniCredit, said the ECB was justifying its dramatic rate hikes during the pandemic by saying it needed to rein in inflation expectations.
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“We should have (should have) cut interest rates as quickly as possible once the risk of inflation expectations becoming unanchored has evaporated. We should have cut interest rates, not in small increments,” Nielsen said. It added that monetary policy remained overly restrictive despite the recovery. Tracking.
In December, after the ECB’s last rate cut in 2024, Lagarde said “the direction is clear” and indicated for the first time that future rate cuts were likely, but this did not seem to be the case among investors. This is a view that has been common knowledge for a long time. And the analysts.
He gave no guidance on the pace or timing of future interest rate cuts, saying the ECB would decide on a meeting-by-meeting basis.
On average, 72 economists surveyed by the FT expect eurozone inflation to fall to 2.1% next year. This is slightly above the central bank’s target and in line with the ECB’s own forecasts, which would see it fall by 0.1 percentage point to 2% in 2026. This exceeded ECB expectations.
A majority of economists think the ECB will continue its current rate-cutting trajectory in 2025, cutting deposit rates by a further 1 percentage point to 2%, according to the FT survey.
Just 19% of all economists surveyed expected the ECB to continue cutting interest rates in 2026.
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Economists’ expectations for an ECB rate cut are slightly more hawkish than investors were pricing in. Only 27 of 72 economists surveyed by the FT expected interest rates to fall to the 1.75-2% range expected by investors.
Not all economists think the ECB is acting too slowly. “The ECB’s policy rate of 3% is too low,” said Willem Buiter, former chief economist at Citi and now an independent economic advisor.
He pointed to strong core inflation (2.7% is well above the central bank’s 2% target) and a record low unemployment rate in the currency area of 6.3%.
France has replaced Italy as the eurozone country considered most at risk of a sudden plunge in government debt, according to FT research.
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French markets have been roiled in recent weeks by a crisis over former Prime Minister Michel Barnier’s deficit-cutting budget plan that led to the overthrow of his government.
58% of survey respondents said they were most concerned about France, while 7% cited Italy. This marks a dramatic change from two years ago, when nine out of 10 respondents named Italy.
Lena Komileva, chief economist at consulting firm (g+) Economics, said: “France’s political instability is fueling the risk of populist policies and rising public debt levels, raising concerns of capital flight and market instability.” ” he said.
Ulrike Kastens, senior economist at German asset management firm DWS, said she remained confident the situation would not spiral out of control. “Unlike during the sovereign debt crisis of the 2010s, the ECB has options for intervention,” he said.
Despite concerns about France, the consensus among economists was that there was no need for the ECB to intervene in euro zone bond markets in 2025.
Just 19% think the central bank is likely to use an emergency bond buying tool, the so-called Protective Telecommunications Instrument (TPI), next year.
Bill Divigny, head of macro research at ABN Amro Bank, said: “Despite the potential for turmoil in the French bond market, we believe there are high hurdles for the ECB to trigger the TPI.”
Additional reporting from Frankfurt by Alexander Vladkov
Data visualization by Martin Stabe
