The European Central Bank (ECB) has taken a significant step by cutting interest rates by 25 basis points, bringing them down to 3%. This latest move marks the fourth rate reduction this year, and the ECB has also softened its previous commitment to maintain “sufficiently restrictive” monetary policy in pursuit of its inflation target of 2%. The decision reflects the ECB’s growing confidence in controlling inflation, even as it acknowledges potential threats to economic growth.
During the announcement, ECB President Christine Lagarde shared insights from the Governing Council, which had considered a more aggressive cut of 50 basis points but opted for a steadier approach with the smaller adjustment. In parallel, Mario Centeno, Governor of the Bank of Portugal and a member of the ECB’s Governing Council, hinted that interest rates could potentially drop to around 2% in the coming quarters unless upcoming inflation data deviates significantly.
While the market anticipates further gradual cuts in rates, experts caution that various geopolitical uncertainties, including trade tensions and divergent fiscal policies within the European Union, could complicate the economic landscape.
Economists Share Insights on ECB’s Rate Strategy
Bill Diviney, head of macro research at ABN Amro, perceives the ECB’s recent communications as a signal of readiness to move towards neutral interest rates if current inflation trends hold steady. He predicts a series of 25 basis point cuts through 2024, ultimately leading to rates stabilizing around 1%. Diviney also points to underlying factors such as demographics and sluggish productivity, which he believes contribute to a lower neutral rate in the eurozone.
Ruben Segura Cayuela, an economist at Bank of America, interprets the ECB’s recent adjustments as a notable shift from its earlier hawkish tone. Cayuela suggests this change reflects a more cautious outlook, forecasting a decline in deposit rates to 1.5% by September 2024. However, he warns that renewed uncertainties surrounding tariffs and trade could lead to quicker rate reductions if necessary conditions are met.
Luca Cigognini, a forex analyst at Intesa Sanpaolo, notes the increasing divergence between ECB and Federal Reserve policies, which is influencing the value of the euro. Post-meeting observations imply that the ECB is likely to proceed with rate cuts, reflecting downward revisions to growth and inflation forecasts for 2025. He also highlights recent technical shifts in the EUR/USD pairing that may further point to euro weakness.
Sven Jari Stehn from Goldman Sachs emphasizes the ECB’s softer stance on growth and inflation, suggesting a cautious approach to monetary policy. He anticipates another rate cut of 25 basis points in January, projecting rates to hover around 1.75% by mid-2025.
Roberto Cobo, chief strategist at BBVA, conveys that the ECB’s recent cut was anticipated, aligning with downgraded inflation and growth projections. He supports a gradual rate adjustment in 2025, particularly given the absence of recession signals.
The Road Ahead for Eurozone Interest Rates
As economists align their predictions, it is clear that the ECB is steering towards a more dovish monetary stance, with future interest rates expected to either stabilize or decrease further. However, numerous risks, including trade disputes and geopolitical complexities, create a challenging environment for forecasting.
While the expectation is for continued 25 basis point cuts at subsequent ECB meetings, the actual speed and magnitude of these reductions will greatly depend on incoming economic data and the evolving landscape of external risks.
Photo credit & article inspired by: Euronews
