Several economists polled by the Financial Times warned that the European Central Bank was too slow to cut interest rates to help the sluggish euro zone economy.
Nearly half of the 72 eurozone economists – 46 percent – said the central bank was “behind the curve” and was out of sync with economic fundamentals, compared with 43 percent confident that ECB monetary policy was “on track.” “The correct one.” “.
The rest said they did not know or did not answer, while no economist thought so European Central Bank He was “on the cutting edge.”
The European Central Bank has cut interest rates four times since June, from 4 percent to 3 percent, with inflation falling more quickly than expected. During that period, the economic outlook for the currency area continuously weakened.
European Central Bank President Christine Lagarde admitted that interest rates will need to fall further next year, amid dull expectations Eurozone growth.
The International Monetary Fund's latest forecasts show the currency zone's economy will expand by 1.2 percent next year, compared with a 2.2 percent expansion in the United States. Economists polled by the Financial Times appear more pessimistic about the eurozone, as they expect growth of only 0.9 percent.
Analysts expect the divergence in growth to lead interest rates in the euro zone to end the year at a level well below borrowing costs in the United States.
Interest rate setters at the Federal Reserve We expect lower borrowing costs By a quarter point only twice next year. Markets are divided between expecting cuts of 4 to 5 basis points from the European Central Bank by the end of 2025.
Eric Dore, professor of economics at the IÉSEG School of Management in Paris, said it was “clear” that “downside risks to real growth” in the euro zone were increasing.
“The ECB has been too slow to cut interest rates,” he said, adding that this had a detrimental impact on economic activity. Dore said he saw “a growing possibility that inflation could fall below the European Central Bank's 2 percent target.”
Carsten Junius, chief economist at GB Safra Sarasin, said decision-making at the ECB appears slower overall 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 on the board.”
UniCredit Group chief economist Erik Nielsen noted that the ECB justified its large increases during the pandemic by saying it needed to keep inflation expectations under control.
“Once the risk of loosening inflation expectations evaporated, they should have cut interest rates as quickly as possible — not in small, incremental steps,” Nielsen said, adding that monetary policy remains overly restrictive even though inflation has returned to normal levels. path.
In December, after the European Central Bank cut interest rates for the last time in 2024, Lagarde said that “the direction of travel is clear” and indicated for the first time that future interest rate cuts were likely – a view that has long made sense among the public. Investors. And analysts.
It did not provide guidance on the pace and timing of future cuts, saying the ECB would decide on a meeting-by-meeting basis.
On average, the 72 economists polled by the Financial Times expect euro zone inflation to fall to 2.1 per cent next year – just above the central bank's target and in line with the European Central Bank's forecast – before falling to 2 percent in 2026, or 0.1 percentage point. Higher than European Central Bank expectations.
According to the Financial Times poll, a majority of economists believe the ECB will continue on its current path of interest rate cuts in 2025, cutting the deposit rate by another percentage point to 2 percent.
Only 19% of all economists surveyed expect the ECB to continue cutting interest rates in 2026.
Economists' expectations for ECB cuts are slightly more stringent than those expected by investors. Only 27 of 72 economists surveyed by the Financial Times expect interest rates to fall to the 1.75 percent to 2 percent range that investors had expected.
Not all economists believe the ECB acted too slowly. “The ECB’s official interest rates are very low at 3 percent,” said Willem Buiter, a former chief economist at Citi and now an independent economic consultant.
He noted how difficult it would be for core inflation – at 2.7 percent, well above the central bank's 2 percent target – to record a low unemployment rate of 6.3 percent in the currency area.
The Financial Times survey found that France has replaced Italy as the eurozone country considered most at risk of a sudden and sharp sale of government bonds.
French markets have been subjected to turmoil in recent weeks due to a crisis related to the previous one Prime Minister Michel Barnierproposed budget to reduce the deficit, leading to the overthrow of his government.
58% of survey participants said they were most concerned about France, while 7% mentioned Italy. This represents a radical shift from two years ago, when nine out of 10 respondents pointed to Italy.
“French political instability, which fuels the risks of political populism and high levels of public debt, raises the specter of capital flight and market volatility,” said Lena Komileva, chief economist at G+ Economics Consulting.
Ulrike Kastens, chief economist at German asset manager DWS, said she remained confident the situation would not get out of control. “Unlike (during) the sovereign debt crisis of the 2000s, the ECB has options to intervene,” she said.
Despite concerns about France, the consensus among economists was that the ECB would not need to intervene in euro zone bond markets in 2025.
Only 19 percent believe the central bank is likely to use an emergency bond purchase tool, the so-called Transfer Protection Instrument (TPI), next year.
“Despite the potential for disruption in French bond markets, we believe there will be a significant impediment to the ECB triggering TPI,” said Bill Deveney, head of macro research at ABN AMRO.
Additional reporting by Alexander Vladkov in Frankfurt
Data visualization by Martin Stubby
