The European Central Bank (ECB) has faced criticism for being too slow in cutting interest rates to stimulate the Eurozone’s sluggish economy. According to a survey conducted by the Financial Times, 46% of Eurozone economists believe that the ECB has „fallen behind the curve“ and is not in sync with economic fundamentals. This sentiment contrasts with the 43% who feel that the ECB’s monetary policy is on the right track.
The ECB has reduced rates four times since June, from 4% to 3%, in response to lower-than-expected inflation and a weakening economic outlook. ECB President Christine Lagarde has indicated that further rate cuts will be necessary in the coming year due to expectations of lackluster growth in the Eurozone.
The International Monetary Fund (IMF) projects that the Eurozone’s economy will expand by 1.2% next year, compared to a 2.2% expansion in the US. Economists surveyed by the FT are even more pessimistic, forecasting growth of just 0.9% in the Eurozone. This divergence in growth is expected to result in Eurozone interest rates ending the year significantly lower than US borrowing costs.
Analysts predict that the ECB will continue to lower rates in 2025, with expectations of several 25 basis-point cuts by the end of the year. However, some economists believe that the ECB has been too slow in its rate-cutting efforts, with concerns about the negative impact on economic activity and the possibility of inflation falling below the ECB’s 2% target.
Despite the criticism, not all economists agree that the ECB has acted too slowly. Some argue that the current policy rates of 3% are already too low given the relatively high core inflation rate and record low unemployment in the Eurozone.
The survey also highlighted concerns over the stability of French markets, with respondents indicating that France is now considered the country most at risk of a sudden sell-off in government bonds, replacing Italy. French political instability and rising public debt levels have raised fears of capital flight and market volatility.
However, despite these concerns, the consensus among economists is that the ECB will not need to intervene in euro area bond markets in 2025. Just 19% of respondents believe that the central bank will use its emergency bond buying tool, the Transmission Protection Instrument (TPI), next year.
In conclusion, while there are differing opinions on the ECB’s monetary policy actions, the overall sentiment among economists is that further rate cuts will be necessary to support the Eurozone economy. The ECB’s response to the economic challenges ahead will be closely watched as it navigates the path towards recovery.
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