The ECB is too slow to cut rates, Eurozone economists warn

The European Central Bank is too slow to cut interest rates to help the euro zone’s sluggish economy, warned several economists polled by the Financial Times.

Half of the 72 euro zone economists surveyed – 46 percent – believed that the central bank had “fallen behind recently” and was not aligned with economic fundamentals, while 43 percent believed that the ECB’s monetary policy was “on the right track.” He said.

But none of the economists thought that the rest either did not know or did not respond. ECB It was “before the twist”.

The ECB cut its target rate to 3 percent from 4 percent in June as inflation fell more than expected. During that period, the economic outlook for the currency area has steadily weakened.

ECB President Christine Lagarde has admitted that the rate deficit is expected to decrease further next year. The development of the euro zone.

The IMF’s latest projections show the currency group’s economy growing by 1.2 percent next year, compared with 2.2 percent expansion in the United States. Economists polled by the FT are more gloomy on the euro zone, expecting growth of just 0.9 percent.

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

Rate-payers at the Federal Reserve Expect to reduce loan costs Only twice in the quarter-point next year. Markets are divided between expecting four to five 25 basis point cuts from the ECB by the end of 2025.

Eric Dore, professor of economics at the IÉSEG School of Management in Paris, said it was “clear” that “risks for real growth” were increasing in the euro zone.

“The ECB is very slow in reducing policy rates,” he said, which is having a detrimental effect on economic activity. Dorr said the ECB’s 2 percent target sees “increasingly low inflation.”

Carsten Junius, chief economist at Bank J Safar Sarasin, said decision-making by the ECB appears to be generally slower than that of the Federal Reserve and the Swiss National Bank.

Among other factors, Junius blamed Lagarde’s “consensus-oriented leadership style” as well as “too many decision-makers in the governing council.”

Erik Nielsen, chief economist at UniCredit Group, said the ECB had to keep inflation under control, confirming the rise it had seen during the pandemic.

“As the risk of deflation evaporates, they need to be deflated as quickly as possible — not slowly,” Nielsen said, adding that monetary policy is still too restrictive even if inflation returns. Track.

In December, the ECB After last cutting rates in 2024, Lagarde said “the direction of travel is clear” and suggested for the first time that future rate cuts are likely – a view that has long been commonplace among investors. And analysts.

The ECB gave no guidance on the pace and timing of future cuts, saying it would decide at a meeting.

On average, 72 economists polled by the FT expect euro zone inflation to fall to 2.1 per cent – just above the central bank’s target and below the ECB’s target. above the ECB forecast.

According to FT research, most economists believe the ECB will continue on its current deflationary path in 2025, lowering the deposit rate by another percentage point to 2 percent.

Only 19 percent of all polled economists expect the ECB to keep rates low in 2026.

Economists’ forecast for an ECB cut is slightly more hawkish than expected by investors. Only 27 of 72 economists polled by the FT expect rates to fall to between 1.75 per cent and 2 per cent, which is expected by investors.

Not all economists believe the ECB has acted too slowly. “The ECB’s policy rate is 3 percent lower,” said Willem Buiter, former chief economist at Citi and now an independent economic consultant.

They pointed to the persistence of core inflation – at 2.7 percent, above the central bank’s 2 percent target – and low unemployment at around 6.3 percent.

France has replaced Italy as the euro area country considered most vulnerable to sudden and extreme sell-offs in government bonds, according to an FT survey.

French markets have tumbled in recent weeks due to the previous crisis. Prime Minister Michel BarnierHis proposed deficit-reduction budget, which led to the collapse of the government.

58 percent of survey respondents said they were most concerned about France, while 7 percent named Italy. This marked a dramatic change from two years ago, when nine out of 10 respondents pointed to Italy.

“French political instability, feeding political populism threats and increasing public debt levels, will increase capital flight and market volatility,” said Lina Komileva, Chief Economist of Consultancy (g+) Economics.

Ulrich Kastens, senior economist at German asset manager DWS, said she was still confident the situation would not spiral out of control. “Unlike the sovereign debt crisis of the 2010s, the ECB has options to intervene,” she said.

Despite concerns over France, the consensus among economists is that the ECB will not need to intervene in euro area bond markets until 2025.

Only 19 percent believe the central bank is likely to use its emergency bond-buying tool, known as the Transfer Protection Instrument (TPI), next year.

Bill Divini, head of macro research at ABN AMRO Bank, said: “While there may be turbulence in the French bond markets, we think the ECB will have a high level to activate the TPI.”

Additional reporting by Alexander Vladkov in Frankfurt

Data visualization by Martin Stabe