ECB has been too slow to cut rates, Eurozone economists warn

The European Central Bank has been too slow to cut interest rates to help the euro zone’s stagnant economy, many economists polled by the Financial Times warned.

Almost half of the 72 eurozone economists polled, 46 percent, said the central bank had “fallen behind the curve” and was out of sync with economic fundamentals, while 43 percent were confident the ECB’s monetary policy was “on the right track.” “.

The rest said they didn’t know or didn’t respond, while no economists thought so ECB: was “ahead of the curve”.

The ECB has cut interest rates four times since June, from 4 percent to 3 percent, as inflation has fallen faster than expected, during which the economic outlook for the currency area has continued to weaken.

ECB President Christine Lagarde has admitted that interest rates will have to decrease further next year amid bleak expectations. The growth of the Eurozone.

The latest IMF forecasts show the currency bloc’s economy will grow by 1.2 per cent next year, compared with 2.2 per cent expansion in the US. :

Analysts expect the difference in growth to mean eurozone interest rates will end the year well below US borrowing costs.

Rate Setters at the Federal Reserve expects to reduce borrowing costs by just twice a quarter point next year.Markets are divided on the ECB’s expected four to five 25 basis point cuts 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” were growing in the Eurozone.

“The ECB is too slow to cut policy rates,” he said, adding that this is having a detrimental effect on economic activity. Dorr said he saw an “increasing likelihood that inflation could fall behind” the ECB’s 2 percent target.

Carsten Junius, chief economist at J Safra Sarasin Bank, said decision-making at the ECB was generally slower than at the Federal Reserve and the Swiss National Bank.

Among other factors, Junius blamed Lagarde’s “consensus-based leadership style” as well as “the large number of decision-makers on the governing board”.

UniCredit Group Chief Economist Erik Nielsen said the ECB had justified its dramatic hike during the pandemic by saying it needed to curb inflationary expectations.

“Once the risk of anchoring inflation expectations evaporates, it should [have] to cut interest rates as quickly as possible in not small incremental steps,” Nielsen said, adding that monetary policy was still too restrictive even though inflation was back on track.

In December, after the ECB last cut interest rates in 2024, Lagarde said “the direction of travel is clear” and indicated for the first time that future rate cuts were likely; and analysts.

He gave no guidance on the pace or timing of future cuts, saying the ECB would decide on a meeting-by-meeting basis.

On average, the 72 economists polled by the FT expect euro zone inflation to ease to 2.1 per cent next year, slightly above the central bank’s target and in line with the ECB’s own forecasts, before falling to 2 per cent in 2026. 1 percentage point above the ECB’s forecast.

According to FT research, most economists believe the ECB will continue on its current path of rate cuts 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 interest rates in 2026.

Economists’ forecasts for ECB cuts are slightly more hawkish than those priced in by investors, with only 27 of 72 economists polled by the FT expecting interest rates to fall to the 1.75 per cent to 2 per cent range expected by investors. :

Not all economists think the ECB has acted too slowly: Willem Buter, former chief economist at Citi and now an independent economic consultant, says “the ECB’s policy rates are too low, 3 percent.”

He pointed to the stickiness of core inflation, which is 2.7 percent above the central bank’s 2 percent target, and the currency area’s record low unemployment of 6.3 percent.

France has replaced Italy as the eurozone country most at risk of a sudden and sharp sell-off in government bonds, FT research has found.

In recent weeks, French markets have been rocked by the crisis over the former Prime Minister Michel Barnier’s proposed deficit reduction budget that brought down his government.

58 percent of respondents said they were most worried about France, while 7 percent cited Italy, a sharp shift 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 [during] In the sovereign debt crisis of the 2010s, the ECB has options to intervene,” he said.

Despite concerns about France, the consensus among economists was that the ECB would not need to intervene in eurozone bond markets until 2025.

Only 19 percent think it likely that the central bank will use its bond-buying tool, the so-called Transmission Protection Instrument (TPI), next year.

“Despite the potential for turmoil in French bond markets, we believe there will be a high barrier for the ECB to activate the TPI,” said Bill Devine, head of macro research at ABN AMRO.

Additional reporting by Alexander Vladkov in Frankfurt

Data visualization by Martin Stubb