The European Central Bank has been too slow to cut interest rates to help the stagnant Eurozone economy, many economists polled by the Financial Times have warned.
Almost half of the 72 eurozone economists surveyed – 46 percent – said the central bank had “fallen behind the curve” and was out of sync with economic fundamentals, compared with 43 percent confident the ECB’s monetary policy was “on track properly”. “.
The rest said they didn’t know or didn’t answer, while not a single economist thought the ECB was “ahead of the curve”.
The ECB has cut rates four times since June, from 4 percent to 3 percent, as inflation fell faster than expected. During this period, the economic outlook for the currency area steadily weakened.
The president of the ECB, Christine Lagarde, has admitted that rates will have to fall further next year, amid expectations of weak growth in the Eurozone.
The latest IMF forecasts show the currency bloc’s economy will expand by 1.2 percent next year, compared with a 2.2 percent expansion in the US. Economists polled by the FT are even gloomier in the Eurozone, predicting growth of just 0.9 percent.
Analysts expect the widening divergence to mean that Eurozone interest rates will end the year well below US borrowing costs.
Rate-setters at the Federal Reserve expect to cut borrowing costs by a quarter point just twice next year. Markets are divided between expecting four to five 25 basis point cuts by the ECB by the end of 2025.
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Eric Dor, 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 to cut policy rates,” he said, adding that this had a detrimental effect on economic activity. Dor said he sees an “increasing probability that inflation may undershoot” the ECB’s 2 percent target.
Karsten Junius, chief economist at J Bank Safra Sarasin, said decision-making at the ECB appears to be generally slower than at the Federal Reserve and the Swiss National Bank.
Among other factors, Junius blamed Lagarde’s “consensus-oriented leadership style” as well as “the large number of decision-makers in the governing council”.
UniCredit Group Chief Economist Erik Nielsen noted that the ECB had justified its dramatic pandemic-era hike by saying it needed to keep inflation expectations under control.
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“Once the risk of anchoring inflation expectations disappeared, they should have cut rates as quickly as possible — not in small, gradual steps,” Nielsen said, adding that monetary policy was still too restrictive despite that inflation was returning. way.
In December, after the ECB cut rates for the last time in 2024, Lagarde said “the direction of travel is clear” and for the first time hinted that future rate cuts were possible – a view that has long been common sense among investors. and analysts.
She gave no guidance on the pace and timing of future cuts, saying the ECB would decide on a meeting-by-meeting basis.
On average, 72 economists polled by the FT expect eurozone inflation to fall to 2.1 per cent next year – just above the central bank’s target and in line with the ECB’s own forecast – before falling to 2 per cent in 2026. 0.1 percentage point above the ECB forecast.
According to the FT survey, most economists believe the ECB will continue on its current rate-cutting trajectory in 2025, cutting the deposit rate by another percentage point to 2 percent.
Only 19 percent of all economists surveyed expect the ECB to continue cutting rates in 2026.
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Economists’ forecast for ECB cuts is slightly harsher than those estimated by investors. Only 27 of 72 economists polled by the FT expect rates to fall to the 1.75 percent to 2 percent range expected by investors.
Not all economists believe the ECB has acted too slowly. Willem Buiter, former chief economist at Citi and now an independent economic adviser, said “the ECB’s policy rates are too low at 3 percent”.
He pointed to the persistence of core inflation – which, at 2.7 percent, is well above the central bank’s 2 percent target – and record low unemployment of 6.3 percent in the currency area.
The FT survey found that France has replaced Italy as the eurozone country most at risk of a sudden and large sell-off in government bonds.
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French markets have been rocked in recent weeks by a crisis over former prime minister Michel Barnier’s proposed deficit-reduction budget, which led to the toppling of his government.
Fifty-eight percent of respondents said they were most worried about France, while 7 percent cited Italy. This marked a dramatic change from two years ago, when nine out of 10 respondents pointed to Italy.
“French political instability, fueling the risks of policy populism and rising public debt levels, raises the specter of capital flight and market volatility,” said Lena Komileva, chief economist at consultancy (g+)economics.
Ulrike Kastens, senior economist at German asset manager DWS, said she was still confident the situation would not get out of hand. “Unlike (during) the sovereign debt crisis of the 2010s, the ECB has the opportunity to intervene,” she said.
Despite concerns about France, the consensus among economists was that the ECB will not need to intervene in eurozone bond markets in 2025.
Only 19 percent consider it likely that the central bank will use its emergency bond-buying tool, the so-called Transmission Protection Instrument (TPI), next year.
“Despite the likelihood of turmoil in French bond markets, we think there will be a high hurdle for the ECB to activate the TPI,” said Bill Diviney, head of macro research at ABN AMRO Bank.
Additional reporting by Alexander Vladkov in Frankfurt
Data visualization by Martin Stabe
